Many see Black Rifle Coffee’s (NYSE:BRCC) success as a short-lived enterprise built on connections with right-wing political supporters, but the fact of the matter is that the firm has built a resilient enterprise in an ultra-competitive market based on sound business acumen. BRCC stock opened at $17.43 on March 3.
Tapping into the downstream consumer goods market is no easy task. The barriers to entry are high with a scattered market that contains a few big players with ample smaller players struggling to make ends meet.
It’s evident that Black Rifle has been traded like a meme asset with an average trade volume of over 3 million, a very abnormal quantity for an investment vehicle with a market capitalization of less than $800 million. But when the dust settles, I believe investors will recognize the true promise of this investment vehicle.
Branding & Sales Strategy
Black Rifle has followed the simple principle of building a brand to tap into its target market by “telling a story.” It has positioned itself as a supporter of veterans, which has stimulated demand from veterans and Americans who wish to support them.
Further to its market targeting is Black Rifle’s well-curated omnichannel strategy, which allows it to sell to its customers across various digital platforms, allowing for a more efficient supply chain. The company’s merchandise adds to this and creates brand awareness by word of mouth without actually having to say something.
Growth and Risks for BRCC Stock
Before I continue raving about this company, I need to concede that there is a headwind for Black Rifle in the form of commodity prices. Coffee is what we call a soft commodity. It takes three to five years for a coffee tree to bear fruit, causing difficulties in adjusting production to fluctuating demand.
The coffee spot price has increased by approximately 73% during the past year. Black Rifle will likely be unable to pass its costs through to consumers for much longer and will, in turn, probably experience stagnating gross margins.
Having said that, I do think this headwind could be coped with considering its transitory nature and Black Rifle’s surging growth. Since 2019, Black Rifle has produced a net sales compound annual growth rate (CAGR) of 67%, a gross profit CAGR of 60%, and grown to more than 1.9 million cumulative customers.
The firm’s management expects sales to grow at an annual rate of 37% over the next two years, and this can be substantiated if we look at Black Rifle’s track record and its status as a top 4 canned ready-to-drink coffee brand within the United States.
BRCC Stock Should Grow Sustainably
If you’ve been following my articles on InvestorPlace, you’ll know that I always emphasize asset pricing due to my belief that stocks often may drift away from the underlying entity’s performance. First off, Black Rifle is the result of a de-SPAC merger, meaning that a publicly traded blank-check company named SilverBox acquired its shares in return for a $150 million cash injection.
It’s crucial to remind ourselves that this is a revenue-generating company, which distinguishes it from other risky SPACs such as Nikola (NYSE:NKLA). Black Rifle’s shares have surged by more than 80% from its pre-merger price, with the stock trading above its 50-, 100- and 200-day moving averages.
I believe that we’re more or less at a non-tradable price for the stock after it’s given up some of its gains this week. Non-tradable means that post-IPO mispricings are less of a possibility and that we’re likely to see the stock form a sustainable growth pattern with more moderate up and down days moving forward.
How did I arrive at this conclusion? I had a look at the asset’s fair equity value by adjusting for the associated debt, cash and shares outstanding. Once geopolitics finds calm, we’re likely to see BRCC stock reach its fair value level and build from there based on the market’s expected future returns of the asset’s cash flows.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.