The Bear Cave is at it again; this time, the short-seller is targeting Coca-Cola (KO). As I recently reported, Bear Cave is not a traditional hedge fund or investment bank specializing in research on short selling, a strategy some investors use to try and profit from a falling share price. Instead, it is an online publication written by a young graduate of Stanford University named Edwin Dorsey. Similar to his previous short reports, Dorsey's bearish position on Coca-Cola stems from select social media posts and broader trends in non-related industries.
In my opinion, Bear Cave has a knack for connecting dots that are not entirely there. While Coca-Cola may not be a high-flying growth stock, I still believe it's worth owning for more risk-averse investors. I'll break down what the short report implies are risks to Coca-Cola and offer my own views on Dorsey's thesis. Let's dig in.
The competition is rising
At its core, the Bear Cave report cites a number of new competitors in the beverage market as a threat to Coca-Cola. For example, Coca-Cola owns a number of hydration drinks, including BodyArmor, Powerade, and VitaminWater. Dorsey believes a new drink geared toward athletes, called Prime, is encroaching on Coke's market.
On the surface, it may look like Dorsey's claim has some merit. According to his report, Prime has already hit more than $500 million in sales for the 12 months ended in August. That's not too shabby for a company that is less than two years old. Moreover, according to Coca-Cola's Q2 earnings report, unit case volume for sports drinks fell by 3%, primarily driven by waning results in the U.S.
While sports hydration results were suboptimal for Coca-Cola during the second quarter, management did not explicitly attribute increased competition as the cause. Moreover, while Prime is undoubtedly gaining popularity, investors should understand a couple of important details.
First, Prime is the brainchild behind YouTube sensations Logan Paul and KSI. Paul, for his part, has been no stranger to controversy, including a number of failed businesses. Furthermore, back in July, lawmakers called for an investigation of Prime by the Food and Drug Administration over concerns regarding its caffeine levels.
So, while Prime has showcased its ability to generate demand, it's possible that the drink should not be marketed toward children, many of whom are active on social media and likely see Paul and his cohorts promoting it. On top of that, Prime is just one drink. Coca-Cola has an arsenal of hydration drinks. I do not believe the company's sports drink category will be dethroned by a single competitor.
Another claim Dorsey makes as it pertains to competition is taking aim at Coca-Cola's water brands, which include Dasani and Smartwater. He believes Coca-Cola's brand loyalty will diminish due to the rising popularity of canned water company Liquid Death.
Similar to Prime, Liquid Death is a start-up that has come to market only in the past few years. Given the company is still private, Liquid Death's financial profile is largely unknown. However, what is of note is that the company reportedly raised institutional funding from a combination of private equity investors and celebrities valuing the company at $700 million.
Liquid Death seems to have acquired a loyal customer base through some good old-fashioned ingenuity, otherwise known as catchy marketing tactics. The company sells physical merchandise, such as clothing and accessories to go along with the easy-to-spot graphics of its cans. But at the end of the day, from my perspective, it looks like Liquid Death occupies little more than a niche.
While consumers may prefer one brand of water over another, the end product is virtually the same. For a start-up to really make a dent in Coca-Cola's legacy water business, it will need to build much more than a cult following.
The last competitor Dorsey cites is in the energy drink segment. Coca-Cola owns a stake in Monster Beverage, and Dorsey views the rise of energy drink Celsius as a big threat. According to Statista, Monster held roughly 30% market share based on U.S. sales as of 2022. This was second only to rival Red Bull.
While Celsius has experienced a meteoric rise in the energy drink sector, it's hard to believe it will catch up to legacy players like Monster anytime soon. Moreover, a few months ago, Monster made a savvy deal when it augmented its own portfolio of energy drinks by acquiring Bang Energy. I see this transaction as a chess move by Monster to force the hand of Celsius.
All in all, I find Dorsey's argument around the competitive landscape uninspiring. In fact, I'd argue that the entrance of new start-ups will lead to new product releases in the long run, as competition often breeds innovation. Furthermore, if push comes to shove, Coca-Cola could, in theory, use its size and influence to tak eover should some of these new offerings begin to encroach on its business or brand identity.
Image source: Getty Images.
And what about weight-loss treatments?
The last part of the Bear Cave report hinges on the rising popularity of weight-loss treatments, including Ozempic and Wegovy. Both drugs were developed by Danish pharmaceutical giant Novo Nordisk.
Right off the bat, I find this argument short-sighted and limited. In addition to Ozempic and Wegovy, Novo Nordisk develops obesity and diabetes medications Saxenda and Rybelsus, which were referred to prominently on the company's most recent earnings calls.
I believe that, like many people, Dorsey likely has seen the revolving sequence of commercials for these treatments and arbitrarily chose two to highlight. In other words, it seems fairly random to reference two of Novo Nordisk's popular treatments but exclude the others. I believe Dorsey lacks a deep understanding of the weight-loss supplement market. To back up my claim that the argument is limited, the report also does not appear to reference Novo Nordisk's top rival, Eli Lilly, the developer of Jardiance and Mounjaro.
In fairness, though, the entirety of the Bear Cave report is hidden behind a paywall, so further details around other weight-loss and diabetes medications may be included. But from the looks of it, this seems unlikely that Novo Nordisk and Eli Lilly are taking aim at Coca-Cola. Instead, they seem to be competing against one another and other drug companies. Lastly, given the size and variety of Coca-Cola's portfolio, the company has the ability to reach all sorts of consumers, even health-minded people who may substitute a soft drink for water or an energy drink.
Should you own the stock?
Data source: YCharts.
As alluded to above, Coca-Cola is not in the same discussion as high-growth technology stocks. Rather, it's a blue chip company that generates steady growth. While this might seem mundane, it's one of the very reasons Warren Buffett has held onto the stock for decades. In addition to its consistent operations, Coca-Cola has raised its dividend for the past 60 years.
This is a pretty incredible feat, especially considering that Coca-Cola has faced its share of competitors during those years. It's this dynamic that has me questioning Dorsey's argument the most. In a way, the report subtly implies that competition is something new for Coke. This is not the case -- and the company's constant pursuit of building a competitive portfolio of products that appeal to a wide array of consumers globally has proven to be rewarding for shareholders.
For an investor like Buffett, Coca-Cola is a predictable source of gains on an annual basis. All told, it's been a rock-solid stock to own for many years. While buying Coca-Cola likely will not produce the same level of returns as other stocks, it will almost certainly lack the volatility as well. For investors looking for steady growth and passive income, Coca-Cola may represent a best-in-class opportunity no matter what the competition looks like.
