New Age Beverages (NASDAQ:NBEV) stock recently rocketed from a market cap of $50 million to over $400 million on CBD-infused beverage hype.
According to the commissioner’s statement on Friday (12/20), “…It is unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.” (Link)
After the Farm Bill was passed on December 20th, the FDA did not change their stance on CBD-infused products and still regards them as illegal in interstate commerce. The commissioners statement surprised many CBD/cannabis investors that were hoping the FDA would ease regulation. Eric Asssarf, a Cowen analyst said the move could “come as a disappointment to CBD manufacturers” (Link). New Age was not expecting the FDA to firm their stance against CBD, and without its approval, the company will face significant delays and reduce guidance in 2019, in our opinion.
The cornerstone of New Age’s thesis was that its CBD-infused products would be legalized and quickly rolled out nationally. If the products are ever legalized, the FDA will likely take several quarters to establish a framework for approval. The path to legalizing CBD-infused products into interstate commerce will not be as straightforward as investors expect, which will wipe away NBEV’s “first-movers advantage,” allowing larger competitors to seize the opportunity.
The FDA Commissioner stated that “pathways remain available for the FDA to consider [CBD-infused products],” however he indicates that “the FDA would only consider doing so if the agency were able to determine that all other requirements in the FD&C Act are met.” (Link)
The FDA does not recognize CBD as a Generally Recognized as Safe (“GRAS”) substance (Link), which is the main requirement under the FD&C Act; meaning the current “pathways” give NBEV’s CBD-infused beverages no chance at approval. Without new legislation, CBD will not be legalized. Given the split control of the legislature and low priority of CBD legalization, it is unlikely that congress would act any time soon on this issue. At the minimum, we expect substantial delays for the release of NBEV’s CBD portfolio.
Fair value is $0.50/share best case scenario is BAD
If Morinda Holdings, a multi-level marketing company, delivers $20 million in EBITDA as advertised, combined pro-forma results (NBEV YTD negative $11.7 million in EBITDA) will be about $8 million in EBITDA. That means NBEV is trading at 50x pro-forma consolidated EBITDA, which is absurd for a collection of irrelevant brands in decline and a multi-level marketing company that sells Tahitian Noni juice (Morinda has also has declined approximately 75% from peak revenue – see our previous article). A big caveat to NBEV investors is that none of the acquisitions made thus far have come anywhere close to meeting CEO Brent Willis’ stated projections (previously documented in past articles Link). We believe there is a high likelihood that Morinda’s EBITDA of $20 million will not translate over to NBEV due to an abysmal historical track record of execution (Xing Tea, Marley Beverages, and Coco Libre have all been failures). In summary, a 5x multiple of $8 million EBITDA is fair value, which is equal to $0.50/share (NBEV paid 4x EBITDA for Morinda Link).
Brent Willis’ promotional statements undermine credibility as CEO
Disclosure: I am/we are short NBEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have a bearish position on NBEV through put options.