CBD-infused drinks looked like they were going to be the next big thing heading in to 2019 and New Age Beverages (NASDAQ:NBEV) looked well-position to capitalize on that trend. However, as worries about health concerns and regulatory obstacles arose, investors abandoned marijuana stocks— including NBEV stock. Now, New Age Beverages stock is trading at just under $2 per share, 74% lower than its 2019 highs.
As you can imagine, the bottom feeders are starting to circle. With NBEV stock trading near all-time lows, its potential rewards are starting to look appealing for some.
NBEV stock, they say, has been thrown in with overall negative sentiment in the marijuana market. They also point to potential growth opportunities on the horizon as a reason the stock might be worth taking a risk for.
Here’s why they’re wrong.
Growth Catalysts Far from a Sure Thing
Right now, the market for CBD in the U.S. is disorganized and uncertain. The Food and Drug Administration has prohibited the addition of CBD to food items— though so far many retailers and manufacturers are ignoring that mandate. Some states have cracked down on CBD sales while others are turning a blind eye while they wait for more clear guidelines.
The bottom line here is that the market for cannabis products in the US is far from being a sure thing. Yes, NBEV has the potential to sell its CBD-infused drinks to hoards of people who believe in its medical benefits, but we are still a long way away from a supportive regulatory environment.
CBD Isn’t Everything
Another argument for NBEV stock includes the fact that not all of the firm’s business comes from CBD products. That’s true, the company also derives a big portion of its revenue from beverage company Morinda.
However, Morinda isn’t exactly a beverage company— it’s an MLM company whose business is based on a massive salesforce pushing the product. In 2019 NBEV found itself caught up with Chinese legislators who restricted MLM activity, an issue investors can expect more of.
Morinda’s Chinese sales are lower this year as a result of the tightened restrictions and could continue to deteriorate if the firm faces more scrutiny. Investors who want to bet on NBEV’s future have to be comfortable with the fact that an MLM scheme is it’s the biggest revenue driver.
Poor Management
Finally, I’m not convinced when it comes to NBEV’s management. The first red flag is the firm’s financial strength, which is shaky at best. The company’s operating cash flow deficit is problematic, especially right now when muted interest in cannabis stocks has taken away an essential fundraising opportunity.
NBEV’s operating cash flow loss from January to September was $20.9 million, free cash flow was negative $25.3 million. The firm was able to pay for that cash burn with asset sales, but that’s only a temporary solution.
NBEV’s debt obligations are also troubling when you consider the amount of cash it has on hand. As of September, NBEV was carrying $76.4 million worth of debt and long-term liabilities around. That’s an $18.4 million increase in just 9 months.
Not only that, but management has poorly executed its strategy in North America. Until now, the firm only had a “sales team of 2 or 3” in North America— a questionable way to manage a segment that the firm itself said was expanding rapidly as the company makes inroads into several different businesses.
The Bottom Line on NBEV Stock
Is there a chance NBEV stock is going to churn out impressive double, or even triple-digit returns next quarter if its business gets back on track? Yes, but the window of opportunity for NBEV is getting smaller by the quarter.
Profitability and debt remain the two most glaring red flags for me, but the uncertainty of the cannabis and CBD markets overall make this stock a risky bet.
For now, I’d stay on the sidelines with NBEV stock unless you’re comfortable with gambling. Unless NBEV can show that its finances are moving into a more stable place, it looks like a falling knife to me.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.