No longer is the story surrounding Boston Beer (NYSE:SAM) about its beer but rather its Truly brand of hard seltzer. After the "summer of seltzer" grabbed the public's imagination, the brewer has staked its immediate future on the light, crisp adult beverage that has proved to have staying power beyond what was first imagined.

And as Boston Beer readies its third-quarter earnings report for release on Tuesday, Oct. 29, investors looking to understand what they can expect should read on.

Smiling woman holding can of Truly hard seltzer

Image source: Boston Beer.

All seltzer, all the time

Craft beer has been largely pushed into the background by seltzer. Demand is so great for hard seltzer that category leader White Claw is actually running out  and has been forced to slash its marketing of the beverage by 30% until the shortage is addressed.

Boston Beer apparently has plenty of supply available, but it has now become the brewer's biggest selling product, surpassing even that of its flagship beer Samuel Adams. As hard seltzer, hard cider, and hard tea have dented the drinking public's preference for beer, it was only a matter of time before the brewer began making more beverage alternatives, and now Truly is the second-largest brand on the market behind White Claw.

It's just smart business. Boston Beer had suffered a long skid in depletions growth -- or sales to distributors and retailers, which is considered an industry proxy for retail demand -- until hard seltzer hit the scene and it was able to reverse course. 

After nine consecutive quarters of depletions falling, Boston Beer has posted six straight quarters of growth, and five of them have been at double-digit rates (Samuel Adams has posted 18 consecutive quarters of decline). There's good reason the brewer is following where Truly hard seltzer's momentum is taking it.

Market dilution a risk

Yet as the category's popularity grows, and analysts say hard seltzer can be a $2.5 billion segment as soon as 2021, more competitors are entering the space. Anheuser-Busch InBev is launching its third hard seltzer brand; Pabst Brewing and Molson Coors have their own brands on the market; and Constellation Brands plans to introduce a Corona-branded seltzer early next year.

Although White Claw's shortage gives Boston Beer the opportunity to gain some ground on the leader, which has a better than 50% share of the market, the influx of competitors plus the brewer changing the taste of Truly to give it a more fruit-forward flavor may limit the gains it can make. It's possible it could even lose some ground.

That's not likely to manifest itself in the third-quarter earnings report, but the scenario may play out over future quarters.

New opportunities to seize

Boston Beer will certainly try to minimize any downside while expanding Truly's upside potential, such as securing rights to be the official hard seltzer of the National Hockey League. While there's limited upside to that, it has a better chance of making a splash with the new lemonade-flavored hard seltzer it will be launching.

Currently Mike's Hard Lemonade -- from the same folks that make White Claw -- is a leader in the space, but there is greater opportunity there. A survey Boston Beer took found 87% of Truly and Mike's Hard Lemonade drinkers say they would purchase the new drink mash-up, so the brewer sees a chance to steal sales from the leader.

What's it worth to investors?

Perhaps the biggest hurdle for Boston Beer is not its seltzer business, but its valuation. Sales are up 23% this year from 2018 while net income has widened a whopping 57% from last year, but its stock is very pricey despite the growth.

The brewer trades at 43 times trailing earnings and 33 times next year's estimates, and its enterprise value is a nosebleed-inducing 50 times the free cash flow it produces. Boston Beer is not a cheap stock. It's also a mature craft brewer, meaning pricing it like a younger growth stock suggests investors might want to exhibit some temperance before diving in and quaffing down its shares.