Without knowing hardly anything about New Age Beverages (NASDAQ:NBEV), you already know that it’s an extremely risky trade. With 2019 coming to a close shortly, NBEV stock is down an alarming 59%.
Since February – and with a brief respite in the spring season – shares have consistently declined. As our own Laura Hoy described, it’s a classic falling knife.
Despite the ugliness in New Age Beverages stock, though, the underlying company undeniably carries speculative appeal. First, NBEV offers multiple beverage brands, with many focusing on the health aspect. And that’s a huge positive considering the current trends in the beverage marketplace. After all, consumers not only want health drinks but they’re willing to pay the premium.
Furthermore, NBEV stock is levered to the cannabidiol or CBD business via the organization’s Marley brand. Thanks to the groundbreaking Agriculture Improvement Act of 2018 (also known as the f
arm bill), hemp and hemp-derivatives like CBD are federally legal, so long as they don’t contain more than 0.3% tetrahydrocannabinol (THC) content.
That passing of the farm bill opened the floodgates to a whole new industry. On paper, this bodes well for New Age Beverages stock, considering its desirable Marley brand. However, as you can see from the share price, things haven’t panned out as planned.
For NBEV Stock, the Problems Are Real
No matter how enticing the narrative sounds, at some point, cannabis-related companies must deliver the goods. Failing that, they’ve got to demonstrate a reasonable pathway to sustainable growth and profitability to keep stakeholders interested.
For New Age Beverages stock, this a problem on both fronts. Again, on paper, the revenue growth appears very impressive. However, as InvestorPlace contributor Vince Martin points out, this year’s top-line sales growth “all came through acquisitions, as detailed in an SEC filing. Morinda, purchased a year ago, contributed $54.8 million in sales. Brands Within Reach, picked up in June, added $2.4 million of revenue.”
Minus the buyouts, revenue growth does not look impressive; indeed, quite the opposite. Martin further notes that:
The legacy New Age business posted sales of $12.6 million, about 5% below last year’s total. And its revenue should not be shrinking. New deals with the likes of Walmart (NYSE:WMT) and 7-Eleven (OTCMKTS:SVNDY) were supposed to drive higher sales.
If these were the only headwinds against NBEV stock, it’d be bad enough. However, Hoy asserts that management created unnecessary roadblocks for themselves. She wrote:
…management has poorly executed its strategy in North America. Until now, the firm only had a “sales team of 2 or 3” in North America— a questionable way to manage a segment that the firm itself said was expanding rapidly as the company makes inroads into several different businesses.
Unsurprisingly, then, the profitability picture for NBEV stock currently looks poor. Losses are widening while long-term debt has expanded. And its products don’t appear to be gaining traction as you might expect.
But the Opportunities Are Real Too
Despite the mismanagement and misfires, New Age still has the Marley brand. While it’s not wise to bank on any one asset, investors may not appreciate how powerful this brand is.
In the U.S., experts forecast that the value of the CBD-infused beverages market will hit $227 million. By the end of next year, it should reach $472 million. And by 2023, this segment will make significant noise as a $1.4 billion market.
Granted, this is pennies compared to the global beverages’ arena. However, New Age doesn’t need to take over the world. Given their small fiscal footprint relative to the beverage giants, NBEV just needs to make an impact in the North American sector.
That’s a much more reasonable objective, which does bode well for New Age Beverages stock. As I said, the underlying company has the Marley brand, and from what I’m seeing in the beverage space, branding is everything.
As several analysts have noted, consumers (particularly Millennials) have gravitated toward health-related drinks. But I can make the case that consumers are actually gravitating toward the perception of health.
Case in point is Coca-Cola (NYSE:KO). In recent quarters, the soft drink behemoth has strung together impressive earnings results. As I mentioned last year, one of Coca-Cola’s most conspicuous rebranding efforts involved packaging their Diet Coke drinks in tall, lithe cans brimming with bright colors.
We know this crap isn’t healthy. Furthermore, Coca-Cola represents big business, hardly a Millennial attribute. Yet the power of this new Diet Coke brand rejuvenated a company that had no business of being rejuvenated.
Imagine what would happen if NBEV management got their act together? The Marley brand could skyrocket NBEV stock.
An Ultra-Speculative Bet, but with a Shot
Please don’t mistake the investment profile of New Age Beverages stock: this is a risky gamble. Even if you were confidently bullish, it’s not something you play with other than with “dumb money.”
That said, among stupid bets, NBEV stock has a believable catalyst. It just needs to survive some ugly challenges, which of course is no guarantee.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.