In the final days of 2021, I concluded that a small speculative position in drink manufacturer Zevia PBC (NYSE:ZVIA) might be warranted after shares have seen a lackluster performance since the IPO. That move was likely seen in response to slower growth and increasing losses as low valuations at the time made me a bit upbeat here.
Zevia offers zero sugar and zero calories drinks based on plant-based ingredients. An increased focus on consumers' own health and that of the environment made the company interestingly positioned, as its sodas, energy drinks, teas, sparkling waters meet these criteria. Zevia has been offering these drinks to consumers through major retailers as well as more specialized channels.
Founded as recent as 2007, the company sold 37 variations at the time of the public offering through more than 20,000 retail outlets, claiming a huge 90% market share in the zero calories naturally sweetened soft drink categories.
The business went public in the summer of 2021, with the offering priced at $14 per share. The resulting $905 million valuation includes a net cash position of $95 million, as a $810 million operating asset valuation was applied to a business which grew 2020 sales by 30% to $110 million, on which a $5 million operating loss was posted.
Ahead of the offering, the company saw first quarter sales for 2022 up 36% while achieving break-even results. Second quarter sales rose 23%, marking a $135 million revenue run rate. Trading at 6 times sales, earnings were pretty much non-existent. This valuation compared to 11 times sales multiple at which Monster Beverage (MNST) traded and 4 times sales multiples of the somewhat controversial National Beverage (FIZZ) business.
Towards the end of 2021, shares had been cut in half, down to just $7 per share. Second quarter results did rise 24% to $34.4 million, in line with the guidance given at the time of the public offering. Third quarter sales grew 22% to $39.0 million, yet volumes were up 26%, as this suggests quite some pricing pressure. Exactly this pricing pressure made that EBITDA losses were reported at $3.5 million, as margins showed deleverage given the decline in pricing. With operating assets trading at $400 million, the sales multiple collapsed to around 3 times sales.
Encouraging was that the company guided for fourth quarter sales to come in around $37 million, up 30-37% on the year before, with margin pressure expected to cool off. That looked interesting, warranting a small speculative position, although the fact that the business was new, and the fact that there were many uncertainties, created a tough set-up, creating far from a riskless proposition.
As it turned out, fourth quarter sales (for 2021) only rose 23% to $34.2 million with adjusted EBITDA losses posted at $5.3 million. Moreover, the fourth quarter included a huge $32 million stock-based compensation expense, triggering a huge $37 million net loss, actually exceeding reported revenues. The 2022 guidance looked quite impressive, with sales seen between $177 and $182 million, yet the fact that fourth quarter revenues missed the mark by a huge degree immediately caused doubts on the outlook.
Shares fell from $9 to $7 overnight in February, as the degree of the earnings fall made that I cut out of my position around break-even levels.
In April, based news arrived as the company announced both a CFO and COO transition. Shares fell to just $3 and change in May after first quarter sales rose 23% to $34.2 million. The issue is that gross margins fell some 8% to 38% of sales as EBITDA losses rose to $8.3 million, again before substantial stock-based compensation expenses. Bad news followed in June as the company announced a CEO transition.
With shares trading at just $2 and change in May, share have been trading around the $4 mark for most of the summer as some stabilization was seen. In August, second quarter sales rose 33% to $45.5 million, yet gross margin pressure made that adjusted EBITDA losses still came in at $6.4 million, marking a $6 million reduction on this metric from the same quarter in the year before.
The third quarter was mixed as revenue growth slowed down to just 14%, with revenues posted at $44.2 million. The company has been aggressive in taking action. Zevia has been aggressive with pricing as sales volumes rose just 2%, indicating huge price hikes embarked upon. This resulted in gross margins improving to 43% of sales as EBITDA losses narrowed to $2.1 million. The issue is that the company continues to dole out massive stock-based compensation expenses at a pace of $6.8 million this quarter, with operating losses of $9.2 million being quite high.
The 44 million shares now trade at $3.70 per share, translating into a mere $160 million equity valuation, including a $44 million net cash position. This implies that operating assets are valued at just over hundred million, actually less than the reported sales.
The problem is in the outlook (among others). The company cut the full year sales guidance to $158-$160 million which implies a fourth quarter revenue guidance of just $30-$32 million. This shows that at the midpoint of the guidance, fourth quarter sales are seen down about 10% from the $34.2 million revenue number in the fourth quarter of 2021. This makes it very hard to save more costs, as investors should likely expect further margin pressure.
No longer having held a position since the start of the year, I am pleased to see cost control in the third quarter, but it obviously has a detrimental impact on the sales guidance as seen in the fourth quarter outlook. This makes it hard to restructure the cost base, but fortunately, the company still has a net cash position here.
With so many uncertainties and a huge hill to climb up, I see no reason to get involved again as the fundamental situation remains too dire to get involved here.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.