As a certified B corporation, The Vita Coco Company (COCO 2.65%) and its suite of better-for-you beverages aim to succeed not only for its shareholders but for the sake of all stakeholders involved in its operations. Sourcing three million coconuts from thousands of farms daily for its flagship Vita Coco drink brands, the company aims to bring coconut water to the masses in a sustainable and empowering way for its farmers.
Vita Coco emphasizes the importance of its suppliers across the Philippines, Sri Lanka, Malaysia, Thailand, Brazil, and Vietnam. It has trained over 1,000 of its farmers in regenerative agriculture and distributed 23,000 seedlings to replace aging plants, On top of this, despite only recently becoming a $1 billion company, Vita Coco has donated nearly 9 million meals and $3 million worth of its products.
Despite this emphasis on all stakeholders, rather than the traditional investor and insider-ownership focus, Vita Coco's version of conscious capitalism could prove to be a win-win for everyone -- shareholders included. Here's what sets the young company apart from its competition.
A rapidly growing coconut water market
Holding a 51% and 81% market share of the coconut water category in the United States and the United Kingdom, the Vita Coco brand remains the heart and soul of the company's business, accounting for 91% of sales. Despite mainly being powered by its successful coconut water line, Vita Coco has continued to diversify its portfolio of beverages, which now include:
- Vita Coco: Coconut water, juice, oil, and non-dairy beverages.
- Runa: A plant-based energy drink made with guayusa from the Amazon rainforest.
- Ever and Ever: Sustainably packaged water in aluminum bottles.
- PWR LIFT: A protein-rich sports drink with electrolytes and zero carbs.
- Private Label: Coconut water sold to retailers to make their own private-label offerings.
With global coconut water sales and the better-for-you functional drink markets expected to grow by at least 10% over the next five to 10 years, the company is well-positioned to capitalize on new beverage trends.
To highlight the ongoing shift from traditional sugar-laden beverages to healthier options, consider that the household penetration rate among Gen Z for Vita Coco nearly doubled to 13% since 2020. Meanwhile, the household penetration rate among millennials grew to 14% over the same time, showcasing a continued interest in healthier options among younger generations.
Most impressive of all is that through the first three quarters of 2023, coconut water was the fastest-growing category of the beverage industry, with sales up 17%. Better yet, Vita Coco coconut water grew sales by 21%, demonstrating the company's ability to continue taking market share despite already leading the U.S. and U.K. markets.
Ramping up profitability
Hampered by skyrocketing transportation costs and rising inflation in 2022, Vita Coco finally got to show the market its true margin potential in 2023 as ocean freight rates declined. Powered by a gross margin and net profit margin that grew by 15 and 5 percentage points, respectively, the company's share price jumped 81% in 2023.
COCO Gross Profit Margin (Quarterly) data by YCharts
Despite this dramatic move higher, a recent development may prove that Vita Coco's stock is still worth buying at today's prices -- especially after its recent 21% dip. After losing a private label partnership with a major retailer in August of 2023, the company announced that the same retailer had asked to restart the deal just a few months later. This is huge for two reasons.
First, it validates the power of Vita Coco's supply chain and shows that it is not easily replaced. Whether this significant retailer was Costco Wholesale or another massive name, it is an encouraging sign that Vita Coco could hold its ground on pricing and still bring the partner back.
Second, management has explicitly stated that it will not renew private label partnerships if it cannot do so profitability -- meaning that it didn't make a last-ditch offer to restart this partnership. Maintaining these private label deals profitably is hugely advantageous for the company as it gets a foot in the door with these major retailers, opening up the possibility for new or increased shelf space over the longer term.
Does the valuation make sense?
With a price-to-sales (P/S) ratio of 3, Vita Coco is neither blatantly cheap nor wildly expensive. However, it is nearly half as expensive as Coca-Cola and one-third the valuation of Monster, despite having similar growth rates to its beverage peers over the last two years.
COCO PS Ratio data by YCharts
Should Vita Coco maintain anything near the double-digit net profit margins it saw in the last two quarters and the double-digit sales growth it has seen since its initial public offering in 2021, the company could quickly outgrow its valuation. With operations poised to benefit from younger generations adopting healthier beverage options, look for Vita Coco's success at mastering the tricky coconut water supply chain to propel its stock higher.
