Amplify Brands' Downfall Has Started
I have been bearish on Amplify Brands (BETR) since the start of 2016 and I have recommended shorting it multiple times over the last few months. I had multiple reasons to be bearish on Amplify Brands, however, the stock had shown great resilience and has been hovering near the $15 mark for quite some time.I first recommended shorting the stock when it was trading just a little over $12, and although the stock has appreciated considerably since then, Amplify Brands’ recent quarterly report further strengthened by bear case.
Amplify Brands reported its earnings yesterday, and although the company delivered better-than-expected results, the stock sold off almost 10% in after-hours trading.
On the earnings front, Amplify Brands reported EPS of $0.13, in-line with the analysts’ estimates. Given the hype surrounding Amplify Brands heading into earnings, the company had to do a lot better than it has to sustain its pre-earnings valuation.
However, as evident by the conference call, Amplify Brands is facing a lot of difficulties and the earnings report may just kick start its downfall towards my price target of $8.
First off, the increasing competition is putting pressure on Amplify Brands’ major source of revenue—Skinny Pop. Amplify Brands' gross margin fell 4% for the quarter and will continue falling amid the increasing competition. Since the company relies on only one product for a major portion of its revenue, I am still bearish on the stock and would recommend shorting it at current levels.
Another reason to short Amplify Brands is the company’s towering valuation. As of now, Amplify Brands is trading at 230 times trailing earnings and has a P/S ratio over 6. Given the growing competitive pressure and falling margins, I doubt that Amplify Brands can continue growing at double-digit speeds for long. Moreover, its margins will continue contracting, thereby making the stock a compelling short.
Amplify Brands will crumble under competitive pressure. The stock is currently overvalued and there’s no way it can justify or sustain its current valuation. The Q1 earnings conference call further highlights the fact that the company is facing many difficulties. Hence, due to the reasons mentioned above, I still think Amplify Brands is a compelling short candidate for the remainder of 2016.