When it comes to the world of penny stocks, you have a lot of high-risk, high-reward stocks. For most of them, the risk portion heavily outweighs the reward portion, and the most likely path forward is for them to remain depressed penny stocks.
For New Age Beverages (NASDAQ:NBEV), the story is a bit different. Much like its penny stock peers, NBEV stock is a high-risk, high-reward stock. But, unlike its penny stock peers, NBEV’s risks and rewards appear balanced at the current moment, and there is a visible and somewhat realistic pathway here for shares to explode higher in the long run.
I’m not saying run out and buy NBEV stock. This stock is too risky for your lunch money. I am saying that, at the very least, this penny stock is worth watching for a potential turnaround. If that turnaround starts to show up in the numbers, then a strong buying opportunity could emerge.
Here’s what to watch for.
The Fundamentals Could Improve
New Age Beverages’ fundamentals have been quite poor for a long time. But, starting in 2020, they could materially improve over the next few years.
As the name would imply, New Age Beverages sells drinks. Most of their drinks are low-calorie drinks intended for the health-conscious crowd. That attractively levers the company’s drink portfolio to strengthening tailwinds in the healthy drinks market, where a growing number of health-conscious consumers are increasingly choosing low-calorie, organic drinks over high-calorie, heavily processed ones.
At the same time, New Age Beverages’ drinks are finally gaining national distribution, as the company has recently landed big partnerships with the likes of Circle K, 7-Eleven and Walmart (NYSE:WMT).
In a nutshell, what you have at New Age Beverages is an increasingly relevant drink portfolio gaining more distribution. That’s a favorable dynamic for sustained healthy revenue growth over the next few years.
If New Age Beverages can sustain a strong gross margin profile and drive positive operating leverage — as we will see soon, those are big “ifs” — then the company will drive healthy profit growth in the coming years, the sum of which should drive the stock way higher.
The Stock Could Fly Higher
Three things need to go right for New Age Beverages in order to drive NBEV stock higher.
First, the company needs to sustain healthy revenue growth. Given tailwinds in the healthy drink market and the company’s widening distribution, this seems very likely.
Second, the company needs to sustain strong gross margins. Given strong demand trends, this also seems likely. Gross margins will probably remain north of 60% for the foreseeable future.
Third, the company needs to drive significant positive operating leverage. This is the big factor, and it’s the one with the most uncertainty.
While New Age is growing rapidly, they are spending big to drive that growth. Through the first nine months of 2019, revenues rose more than 400%, while operating expenses rose nearly 800%. The expense rate year-to-date is about 70%. Gross margins are down nearly 60%. Unless the company drives positive operating leverage, New Age will never strike a profit.
Will they drive positive operating leverage? Tough to say. The global beverage market is a tough one, with fickle demand, very little brand loyalty, and ton of reliance on distribution. In that tough market, New Age is one of the less established and smaller players, so it reasons that they will have to keep spending big to grow big.
But, the big question is: can revenue growth outpace expense growth meaningfully going forward? If yes, this stock will fly higher. If no, shares will remain depressed.
Bottom Line on NBEV Stock
It’s too soon to tell whether this stock is a buy or a sell at current prices. The key here is that the company’s revenue growth rates need to start meaningfully outpacing their expense growth rates. If this starts to happen in 2020, then shares will skyrocket higher. If it doesn’t happen, the stock will remain depressed in penny stock territory.
Given that, the game-plan is simple. Wait on the sidelines and see how next quarter’s numbers turn out. If revenue growth outpaces expense growth, buy the stock. If not, hold back and wait until the next print.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
