Following the tremendous move of Annie's, Inc (BNNY) from the IPO price of $19 to its highs of $40 per share, many investors scratched their heads at the "tech stock" valuation the market gave to this tiny natural and organic foods company. Sure, the organic food market has been on fire, growing over 12% annually for the past decade. Ask anybody who has ever been to a Whole Foods (WFM) or looked at its stock. Was the recent move rational, or was this the result of a short supply of stock and over-exuberant investors?
Chirs Katje wrote a great article the other day explaining the business and why there is much to be excited about. But even he thought that the upper IPO range of $19/share was too much and cautioned investors to wait for it to drop to the $15-$16 range before entering the stock. Unfortunately, investors never got that opportunity as Annie's doubled after the IPO, then later dropping back down to $35.
I decided to create a DCF model, to figure out exactly what kind of growth investors have currently priced Annie's at. After the analysis, I found that Annie's would need about 25% top-line growth for next year, followed by 2% less each year for the next 5 years, followed by 5% terminal growth, to still be worth under $10/share, nowhere near its current valuation.
Of course, the company has some momentum. I noticed that Cost of Sales as a percentage of revenue has consistently been falling, going from 65% to 60% in the last three years. Even though Annie's intends to purchase equipment for some of its processes, it has limited Capital Expenditures to only a few million dollars a year for the next few years. The story of the company itself is great, and the organic food market is bound to grow way more than the currently estimated 4%. However, the stock price is still not justified.
Even if you think Annie's Inc can triple EBITDA from $20 million to $60 million in 3 years, why would an investor pay 10x forward EBITDA? Where is the room for upside? It's priced to (beyond?) perfection and there is absolutely no margin of safety. It takes only one bad quarter for the stock to lose 50% of its value overnight, while another quarter of 30%+ growth should not increase the stock price since it is already built into investors' expectations. The history of the stock market is littered with super high-growth companies that eventually crashed and burned because they couldn't meet and sustain their super high growth expectations [Krispy Kreme Donuts (NYSE:KKD) - a stock market darling for a while]. Unfortunately it is difficult to predict when the stock will crater, and the market can stay irrational for a while.
Feel free to take a look at the model and offer suggestions to improve it. There may be some parts I have overlooked or simplified to make my life easier. You could also argue that the WACC of 15% may be a bit high, but even lowering this to something like 10% puts this stock at the IPO price of $19. Numbers from the S-1 have been finagled to convert Year ended to Q4 instead of Q1.