The “meme stock madness” of early 2021 is fading. And, that’s bad news for a couple former favorites of the Reddit WSB trading community, including Naked Brands (NASDAQ:NAKD) stock. The intimate apparel purveyor, which in recent months has hyped itself up as an e-commerce play, has been on a roller coaster ride since the start of this year.
Kicking the year off at prices well below $1 per share, the stock hit prices nearing $3.50 per share, all in a matter of weeks. But, over the past two months, it’s been gradually falling back towards earth. Changing hands for around 69 cents per share today, some may see it now as a “buy the dip” opportunity.
But, is it really a great buy after its decline? That depends. On one hand, now with a war chest of cash, and zero debt, there is underlying value here. On the other hand, it’s still too early to tell whether its transition from brick-and-mortar to e-commerce could pay off. If this pivot takes longer than expected, shares could continue to slowly slide back to lower prices.
So, what’s the best move here? Downside risk isn’t as heavy as it was just a few weeks back. But, it may take years for this stock to take off again. As a long-shot “contrarian” play, it may be worth it as a cautious buy. If you’re looking for a fast trade, better options lie elsewhere.
NAKD Stock Now Trades at a More Reasonable Price
At its highs, the trading price of Naked Brands shares fully reflected its e-commerce potential. And then some. Yet, with shares back under $1 per share, valuation is starting to make more sense. How so? Namely, thanks to the company’s dilutive share offerings earlier this year, the company now has zero debt, and $270 million in cash in its coffers. Also, with the planned sale of its brick-and-mortar operations, soon it will no longer be tied down with the challenges that face this industry (Covid-19’s “new normal,” e-commerce’s disruption of the traditional retailer business model).
Sure, even after its massive sell-off, NAKD stock still sells at a premium to this cash hoard. Based on today’s prices, its market capitalization stands at around $445 million.
But, even though it’s no “deep value” play, contrarian investors may be willing to take a chance, given its potential to successfully pivot into a profitable e-commerce business. The flip-side to this, however, is that finding success in e-commerce will take time. It will take more than just a few fiscal quarters to turn this company into a fast-growing, highly profitable business.
With a long road ahead, investors may continue to cut their losses. This added downward pressure may push the stock to prices further below $1 per share. Yet, while the downside risk remains, it may still be a worthwhile play for more contrarian-minded and long-term investors.
The Jury’s Out Whether the Transformation Will Pay Off
Less overvalued now than it was back in February, at first glance NAKD stock looks like a worthwhile bet when it comes to risk/return. Shares could continue to make another big slide. But, if its e-commerce plans pay off, shares could bounce back to many times what they trade for today.
Yet, assessing the odds of this happening, admittedly it’s difficult. Even with the aforementioned cash reserves. Yes, the company could plow this money into organic growth. And, as InvestorPlace’s David Moadel discussed Mar. 19, the company has the potential to use this money to acquire existing e-commerce brands in accretive transactions. That is, acquisitions that add value for shareholders.
But, just having the cash doesn’t guarantee success. $270 million may be a nice chunk of change. But, when you factor in the competition from generalist behemoths like Amazon (NASDAQ:AMZN), and large companies catering to this same niche, like L Brands’ (NYSE:LB) Victoria’s Secret, Naked has its work cut out for it if it intends to invest heavily to acquire market share organically.
As for bulking-up via mergers and acquisitions (M&As), the relatively high percentage of M&A deals that fail to deliver value makes an acquisition-heavy growth strategy an uncertain one as well.
Consider Naked Brands as a Long-Shot Turnaround Play Only
With the overall “Reddit stock” phenomenon losing momentum, company-specific catalysts are necessary to move the needle from here. Yet, while it may be on the right track with its shift to e-commerce, it could be many years until it sees a “payoff” from these efforts.
In short, consider NAKD stock a long-shot, long-term play. With a low likelihood of it breaking out once again in the near-term, look elsewhere for such opportunities.
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.