Please ensure Javascript is enabled for purposes of website accessibility

This Under-the-Radar Company Hopes to Quintuple Sales. Is It a Buy?

By Jon Quast - Mar 8, 2021 at 7:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Attempting to see both sides of an argument can help you make better investing decisions.

In 2020, frozen-food company Tattooed Chef (TTCF -1.94%) went public with the help of a special purpose acquisition company (SPAC).

An SPAC doesn't have to provide as much financial transparency as companies that go public through the more traditional route of an initial public offering (IPO). It's one of the downsides with SPACs for investors: You have to piece together information gradually as it becomes available.

Perhaps this is why some SPACs have been vulnerable to attacks from short-sellers. In November, Kerrisdale Capital released a 20-page report detailing why it was short shares of Tattooed Chef. In other words, the firm believes the stock will fall, and it's actively betting on it to happen. Meanwhile, Tattooed Chef supporters point out this is a rapidly growing company. In fact, management believes sales will quintuple by 2026.

Whom should investors heed more: Kerrisdale Capital or Tattooed Chef management? I believe it's worthwhile to explore both sides of the argument before deciding how to proceed with this stock.

An assortment of fresh fruit and toppings arranged around an acai bowl

Image source: Getty Images.

A lot to like

Tattooed Chef officially reports earnings on March 10, but management has already released its preliminary financial results. Full-year 2020 revenue is expected to be $149 million, up 76% from 2019. The company benefited as consumers ate at home more often during the pandemic. But don't be quick to attribute all of its success to temporary shifts in consumer behavior. Its revenue in 2019 was up almost 80%, long before the coronavirus.

The company has grown through new distribution deals and by introducing new products. Management believes that these two initiatives plus acquisitions can carry its total revenue over $1 billion by 2026. For perspective, this represents an approximately 37% compound annual growth rate (CAGR) for the next six years, which doesn't seem too far-fetched given the company's recent performance.

For what it's worth, it seems Tattooed Chef is already outperforming Kerrisdale Capital's bearish analysis when it comes to growth. Much of Kerrisdale's thesis argues the company will fail to penetrate grocery retail like it has warehouse clubs. But in its analyst-day presentation in December, management noted the company has gone from being available in just 467 Walmart locations late in 2019 to almost 2,700 late in 2020. This rapid expansion in Walmart distribution suggests Kerrisdale's grocery argument is overdone.

If Tattooed Chef's success in gaining distribution with Walmart is indicative of future growth (keep in mind the company also recently signed a deal with Target as well), then a major basis of its growth story is intact. 

Some food for thought

As Kerrisdale Capital performed its independent research, it concluded Tattooed Chef's sales for the fourth quarter of 2020 were set to decline. With its preliminary results, Tattooed Chef confirmed Kerrisdale's prediction. The company says preliminary fourth-quarter revenue was $39.5 million, up 47% year over year but down about 4% from the third quarter. For a company that expects a long-term CAGR of 37%, a sequential decline does feel like a problem.

That said, we don't really know why there will be a decline. Like most companies, Tattooed Chef recognizes revenue when products are delivered to retail outlets -- not when they sell to the end consumer. Therefore, when distribution expands quickly, revenue soars, but it's not a good indicator of actual consumer demand. And we don't know if revenue declined because of distribution or consumer demand. For the record, the latter would be major red flag, and it's what Kerrisdale Capital believes is happening. 

But it could just be a case of industry seasonality. Consider that from the third quarter of 2019 to the fourth quarter of 2019, Tattooed Chef's revenue was only up approximately 8.5%, even though revenue for the full-year ended up being 80% higher than 2018. Therefore, it appears that the end of each year may just be a slower time for Tattooed Chef's sales in general.

A man strokes his chin while thinking.

Image source: Getty Images.

Is it a buy?

The full bear case against Tattooed Chef stock is far more elaborate than what can be addressed here. But after considering some of the points above, I don't believe this is a stock worth shorting. It has grown quickly, and with about $200 million in cash as of late February, management can spend aggressively on marketing, acquisitions, and expanding capacity. To me, shorting something like this is far too risky.

That said, Tattooed Chef also isn't a stock I'm buying today, because I have reasonable doubt about end demand among consumers. Once the company fills out its distribution channels, I'm not convinced growth rates can be sustained simply by launching new products. Some believe this stock deserves the same valuation as high-flying plant-based meat companies. But if the consumer demand isn't there like it is for plant-based meats, then the company's valuation of 11.5 times trailing 12-month sales already looks stretched to me.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tattooed Chef, Inc. Stock Quote
Tattooed Chef, Inc.
TTCF
$7.09 (-1.94%) $0.14
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$148.21 (0.11%) $0.16
Target Corporation Stock Quote
Target Corporation
TGT
$219.25 (-0.22%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.