Tattooed Chef Is Still Overvalued, Despite Recent Strong Growth
Tattooed Chef (NASDAQ:TTCF), the plant-based frozen food company which makes ready-to-cook bowls, produced strong results for the fourth quarter and 2020. But TTCF stock still looks to be fully valued, even though it has come down a bit from its recent peak.
TTCF stock went public via a SPAC deal last year and spiked up to a high of $28.64 per share in mid-January. As I wrote last month, the stock was the subject of a scathing short-seller report in November 2020.
But the company seems to have countered most of the allegations.
Stellar Results for 2020 and Upside in 2021
Moreover, the results issued on Feb. 22 for its recent quarterly results showed strong growth. Its revenue rose 47% in Q4 and 76% growth in 2020 compared to the respective prior-year periods. The company will report its full results on March 10, and no profit numbers were released on Feb. 22.
However, as I wrote last month, Tattooed Chef has already forecast $222 million in revenue for 2021. This was in its slide presentation (page 34) in December 2020. On page 33 of that presentation, the company predicted $148 million in revenue for 2020. The statement on Feb. 22 said that Tattooed Chef made $149 million — so it was right on target.
Moreover, page 34 shows the company’s forecasts for sales growth through to 2026. At the end of the fourth year, sales are forecast to be $1 billion. That represents cumulative growth of $851 million over the next six years, or 33.7% annually on a compound basis.
But adjusted EBITDA is forecast by the company to grow from $10 million in 2021 to $200 million by 2026. This represents a much higher growth rate than sales. That works out to 64.75% average annual growth over the next six years. This is twice as fast as its sales growth.
Valuing Tattooed Chef
The company’s valuation right now is $1.6 billion, or 10.7 times its 2020 sales of $149 million. It’s also 7.2 times its 2021 forecast sales of $222 million. However, the EV-to-sales ratio and EV-to-adj. EBITDA ratios are lower.
This is because the company just reported that due to recent warrant conversions into stock, it now has $200 million in cash. That gives it an enterprise value (EV) valuation of $1.4 billion ($1.6 billion minus $200 million).
The company expects to see adjusted EBITDA (earnings before interest, depreciation, taxes, depreciation, and amortization) in 2021 of up to $10 million. Therefore its EV-to-sales multiple is just 6.3 times 2021 sales but 140 times EV-to-adj. EBITDA.
That EV-to-adj. EBITDA multiple for 2021 is very high. But by 2026 the EV-to-adjusted EBITDA ratio is just 7 times (i.e., $1.4 billion divided by $200 million in adj. EBITDA). That is a very reasonable valuation, at least as long as the forecast comes to pass.
However, to account for risk and the time value of money, we need to adjust that forecast by a discount rate. Using a 15% annual discount rate, the factor in year 6 is 43.2%, and the present value of adj. EBITDA works out to $96 million.
Therefore, the risk-adjusted EV-to-adj. EBITDA for 2026 is 14.6 times (i.e., $1.4 billion divided by $96 million). This is a very high ratio and essentially means that the TTCF stock is still fairly valued-to-overvalued.
What To Do With TTCF Stock
You can see that the company is growing quickly and it recently met its own growth projections. The problem is even if it continues to meet its own projections, TTCF stock is still at full value. There is essentially no bargain element.
Moreover, the short report by Kerrisdale Capital mentioned above focuses on the company’s concentrated product and customer focus. It calls the valuation the stock has now “fanciful.”
A more reasonable price would be $15 per share. This would give TTCF stock a $1.075 billion market cap and an $875 million million enterprise value (EV). At that price, the EV-to-sales ratio is just 3.9 times 2021 forecast sales. Moreover, in terms of profitability, its 2026 EV-to-adj. EBITDA (present value) multiple would be just 9.1 times. This is reasonable given its growth rate.
Therefore look for the stock to fall another $6 to $7 over the next year, as the fanciful valuation comes down to earth.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.