In a recent article, I referred to Naked Brand (NASDAQ:NAKD) as a “meme stock.” The under-the-radar intimate apparel company has become one of many stocks popular with retail speculators. “Meme stock status” has been a positive for NAKD stock. It has allowed the company to raise millions in new capital and reinvent itself as an e-commerce play.
It could be a very different story for investors buying in at today’s prices. Based on its current valuation, the company’s budding online retail operations will need to see tremendous growth going forward.
If this fails to happen, there won’t be much to support the stock at today’s prices (around $1.20 per share).
In fact, this house of cards could come tumbling down much sooner than that. Those who got in back when shares were changing hands for mere pennies have likely taken profit. Once those who got in too late realize there’s “no there, there” with Naked Brand, shares will start to sell-off.
Maybe not to the lows we saw a few months back (below 10 cents per share), but at prices substantially lower than what we see today.
Why NAKD Stock Differs from Other Meme Stocks
There’s a good reason why I said there’s “no there, there” with Naked Brand. Unlike some of the other meme stocks out there, this company lacks exposure to an exciting megatrend. Even if its results are lukewarm, megatrend exposure could help sustain interest in the stock.
What do I mean? For example, Sundial Growers (NASDAQ:SNDL), another popular low-priced “meme stock” among traders, at least has the possibility of U.S. pot legalization working in its favor.
Churchill Capital IV (NYSE:CCIV), which could be close to buying EV upstart Lucid Motors, at least has the prospect of scaling up rapidly, as the world shifts from gas-powered cars to EVs.
For Naked, there is no concrete “megatrend” working in its favor. Sure, you can say that it’s a play on the rise of e-commerce, but while fashion e-commerce growth isn’t anything to sneeze at, its growth pales in comparison to possible growth in the U.S. marijuana and electric vehicle markets.
According to Statista, e-commerce fashion sales are set to rise from $142.8 billion, to $181.4 billion, between 2021 and 2025. In other words, around 27% percent growth in the next four years. Compare that to projected U.S. EV industry growth, and it’s no contest.
A frothy valuation (which Naked currently has) isn’t in and of itself a bad thing, but it won’t be sustainable if the company lacks the high growth necessary to back it up.
Naked Brand’s $619 Million Valuation Won’t Last
Admittedly, it’s easy to get lost in the weeds with valuation. In a zero-interest rate environment, comparing stock market prices today against historical averages could a case of comparing apples to oranges.
Even taking into account the “new normal” when it comes to stock multiples, it’s still tough to rationale Naked’s current valuation.
Per calculations from InvestorPlace’s Mark Hake, after the recent capital raise, there are around 476 million outstanding shares of NAKD stock. At $1.20 per share, that’s around a $619 million market capitalization.
By contrast, trailing twelve-month sales come in at around $54.7 million. To complicate matters, one would expect that sales going forward are going to be substantially lower with the company divesting its brick-and-mortar business.
With little indication of massive growth ahead, I’m doubtful results in the coming years will be enough to sustain Naked Brand’s current valuation. The question is, when will this discrepancy finally affect the stock price?
The jury’s still out. For the time being, NAKD stock will continue to trade divorced of its fundamentals. This could mean more outsized moves higher, even on what amounts to small potatoes news. But, if the current environment does a 180?
Brace for impact! If markets take a tumble, stocks that saw outsized gains on minimal news (like this one) will see outsized declines in a market meltdown.
Bottom Line: Don’t Waste Your Time
Putting it simply, investors buying this today are betting that we’ll soon see a second round of the speculative mania that sent shares from mere pennies up to prices topping $4.40 per share. Is it possible this happens? Certainty. But, can you handicap its probability? I wouldn’t go that far, as it’s a case of trying to predict the unpredictable.
Outside of this rationale (more gambling than investing), there’s little appeal with Naked Brand shares. Unlike other meme stocks, there isn’t a potential-game changer around the corner that will send its business into hyperdrive. And, while its plans to focus on e-commerce could wind up profitable, chances are it won’t be to the extent currently priced into shares.
So, as shares take a breather after their recent run-up, what’s the best move? Stay away from NAKD stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
