In recent weeks, Black Rifle Coffee (NYSE:BRCC) has become one of the hottest special purpose acquisition companies (SPACs) out there. Since its deSPACing on Feb. 10 when the deal between it and SilverBox Engaged Merger officially closed, BRCC stock has soared from near its offering price of $10 per share to nearly-$20 per share as of this writing.
Its post-deSPACing rally is not surprising, given that this SPAC stock, much like Digital World Acquisition (NASDAQ:DWAC), has a political angle to it. Since 2020, it has tried to soften this a bit. But the coffee purveyor’s big success is due in large part to its association with the “Trumpian” wing of the political right.
It is attempting to circle back to its roots as a coffee brand focused on military veterans. Yet, its ties to the Trump political movement continues paying off for it. This time, like we’re seeing with DWAC, it helped to jolt enthusiasm for its publicly-traded shares.
As a result, this name may be able to sustain an inflated valuation for longer than you think. That said, you may want to tread carefully if you are looking at this as something more than a short-term trade.
BRCC Stock at a Glance
Founded in 2014 by former Green Beret Evan Hafer, Black Rifle Coffee started off as a direct-to-consumer (DTC) seller. With its rise in popularity and on the heels of the Trump political movement, which kicked off shortly after its founding, the company saw tremendous expansion.
First, it was through the sale of its products in store. Now, it is through its own retail locations (“Outposts”). As a result, it has scaled into a $230 million per year business (based on 2021 revenue). Some investors may be buying BRCC stock because of its high level of revenue growth.
Still, the main driver in its popularity is its Trumpian connection. This could be due to Trump supporting investors buying it, like they may be doing with DWAC stock. Or, traders, indifferent to all of the politics, may hope that this SPAC performs as well as the official “Trump SPAC.”
Whatever the reason, shares could continue to perform well in the near-term. Those looking for a trading opportunity may find one here. But as a long-term investment? Not so much.
Concerns and Risks With Black Rifle Coffee
When it comes to BRCC stock and risk, the elephant in the room may seem like the largest one. Although it distanced itself from certain controversies, the company continues to capitalize on new ones. For instance, it is doubling-down on advertising for Joe Rogan’s podcast. Due to his featuring of guests on his show discussing alternative theories on Covid-19, as well as Covid-19 vaccine skepticism, singer Neil Young and other prominent names have tried to get his program “canceled” from Spotify (NYSE:SPOT).
However, politics isn’t the main issue with Black Rifle Coffee. Supporting right and right-adjacent causes helps its brand. The left may dislike it, but it is not as if the company, which uses an omnichannel sales model, could be “canceled” in a way that materially impacts its business.
What then, is the primary risk with this stock? As it was a few months back, when I wrote about its SPAC predecessor, valuation is what you should be most concerned about. Just like with DWAC stock, BRCC stock sports a valuation that is well above the underlying value of its business. How so? With the merger now closed, there are 191.4 million shares outstanding. At $20 per share, that is a $3.83 billion market capitalization.
Compare that to its 2021 revenue. Even if we assume the forecasts provided in its investor presentation pan out and the company hits $430 million in sales by 2023, at today’s prices, it is trading for nearly 9x projected sales a year out. For comparison, another fast-growing coffee company, Dutch Bros (NYSE:BROS), trades for around 5.1x estimated 2021 sales and 3.7x estimated 2022 sales.
Bottom Line: The Main Issue Remains the Same
I’ll admit that I may be short-sighted by calling shares overvalued based only on near-term projections. If it scales up to $430 million per year in sales by 2023, chances are it will continue to experience solid revenue growth in the years after that.
However, who is to say it will continue growing at a fast pace this year and the next? Much of its future growth hinges on the success of its retail “Outpost” locations. It may not be able to repeat the success it had with DTC coffee sales with this latest growth initiative.
Seeing as DWAC stock continues to fly high despite its own valuation red flags, I wouldn’t bet against BRCC stock in the short-term. At the same time, I wouldn’t view it as a great long-term wager, either.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
