Alexander Green launched a promo campaign for his Oxford Microcap Trader recently, and the bait he dangles for investors is a report about his five favorite microcap stocks — small companies that he doesn’t just like, but is also buying personally. Some newsletter publishers prohibit their pundits from trading in the stocks they cover, but it looks like Oxford Club isn’t one of them.

The Thinkolator identified the first one for you on Tuesday, that was his “#1 microcap for 2023” … but we didn’t get to the other four. So that’s the goal today… let’s find some more small caps for you, discuss them a bit, and see if we find any of them appealing right now.

I’ve had some folks asking me to break things up a bit, and this story went a little long, so we’re going to split it into four sections for you… you can click below to jump around if you like…

• Microcap #2 — Synthetic Biology Disruptor
• Microcap #3 — Beat Inflation With This Luxury Small Cap
• Microcap #4 — This Booming Small Cap Is About to Take Off
• Microcap #5 — Sweeten Your Profits With This Tiny Company

Here’s a little excerpt from Green’s spiel, just to get us going on the first one:

Microcap #2 — Synthetic Biology Disruptor

“Just like my #1 microcap for 2023, each of these stocks is trading at an incredibly cheap price… with tremendous upside potential.

“And I’ve invested personally in each and every one of them.

“The first one is less than $5 a share.

“It is at the forefront of a new technology that could be the most transformative in history….

“Billionaires Bill Gates, Jeff Bezos, Peter Thiel and Marc Andreessen Are Going “All-In” on This Technology.”

So what’s the story? What’s this “new technology?” More from the ad:

“… it’s called synthetic biology.

“And it is a truly groundbreaking innovation.

“In short, it allows you to synthetically build organic material.

“It’s disrupting everything, from agriculture to medicine to food.

“Boston Consulting Group says… ‘Synthetic biology technologies are finally maturing, becoming the way that almost anything can be manufactured competitively and sustainably.'”

What’s the potential for this “synthetic biology” stuff?

“It can make blood tests that detect cancer at an early stage.

“It can create artificial rubber tires that are far more durable than tires made from natural rubber… and with the same performance.

“And perhaps biggest of all… it could completely replace fossil fuels with synthetic alternatives.”

This has been a hot area over the past couple years, with a few different stocks being pitched in this space… and they’ve all come crashing down, so they’re all very small companies right now. Which one is Alexander Green touting here?

The clues get a little more specific….

“… there’s one small cap company at the forefront of it all.

“It’s the very first public synthetic biology company, so it’s got a massive “first-mover” advantage.

“Bill Gates has directly invested millions into it.

“And John Doerr – a billionaire venture capitalist and early investor in Google and Amazon – also has invested millions into it.

“And today, you have a once-in-a-lifetime chance to invest in this company right alongside them… and me… at less than $2 a share.”

And a couple more useful hints from Green’s spiel…

“It just reported record customer revenue growth of 108% this quarter….

“The company has 13 products… but 18 are in the pipeline.

“Each can generate up to $100 million in revenue.

“So you’re looking at a potential $1.8 BILLION in revenue coming soon…”

The stock that’s most often touted in this “synthetic biology” space is the much larger Ginkgo Bioworks (DNA), which has been pretty steadily teased by a variety of newsletters over the past year, as it went from a glamorous SPAC merger to a collapsing business (with fraud allegations from short-sellers), and now to real “penny stock” status.

But it looks like Alexander Green is going back a bit further, to a company that’s been public for more than a dozen years (and has accumulated losses of about $2.7 billion along the way) — this is almost certainly Amyris (AMRS).

Amyris is the “microcap” in this space these days, though it did get up to about a $5 billion valuation in 2021. Both DNA and AMRS have gotten clobbered, they’re both down 90% or so from their 2021 highs, but AMRS today is quite a bit smaller, with a market cap now of about $500 million (DNA is still over $3 billion).

And Amyris, with that much longer history, is certainly more established — it might not have the “Microsoft of the future” allure of a growing “code base” of synthetic cells like Ginkgo, but it has a more targeted lineup of products, including their own health and beauty brands, and Amyris is not really involved in the up-and-down COVID-19 market for testing and similar products, the way Gingko is, so their revenue is a bit steadier, with their “core revenue” growing faster than Ginkgo’s non-COVID “foundry revenue.”

But boy, it’s hard to get around the huge amount of capital that this little company has chewed through already… and for me, that puts them in the “fragile” category. Not only have they already used billions of dollars in building to this point, but they also have more than $800 million in debt, and are perilously close to running short on cash. They believe their cash problem will be solved through a few strategic transactions — they borrowed some new cash on a term loan after the last quarter ended (so their debt must be near $1 billion now), and they also said they have $350 million coming from a deal to sell exclusive rights to two of their molecules, which would be enough to keep them going for a while, and plans to cut costs and rationalize their business to focus on their profitable consumer products, even as their expenses fall because of the launch of the production facility in Brazil.

If that works out, it might end up being a great bet — but I don’t know what the odds are. If their expected cash doesn’t come in over the next month or two, things will probably start to get very tight again (they should have $180 million from their new loan, whose terms weren’t disclosed, but before that they were down to $18 million in September, with another $90 million in debt coming due at some point in the next year, and they burned through about $140 million last quarter). If they do have to finance in some other way, or any of these deals fail to bring in the cash they need, it could get ugly — having to raise equity capital at less than $2 would be pretty disastrous for them (it probably wouldn’t come to that, they may well have other venture backers who could lend them money if they’re confident about the future prospects, perhaps including John Doerr, the legendary venture capital investor who has been involved with Amyris for a very long time and owns close to 20% of the company).

Does Amyris have a product that’s special enough to get them over the hump and create some operating profit? Maybe, they do have some ingredients, like a synthetic squalane, that are in huge demand… but it appears that either they can’t charge enough, or they can’t make enough, to be profitable anytime soon. Their revenue comes primarily from health and beauty products, and is increasingly from their own “clean beauty” brands (as opposed to selling synthetic ingredients), and owning a growing brand can be important, but they’re not anywhere near the scale they’d need to make it a going concern at this point.

The company’s goal is to be “sort of” profitable by the end of next year, with a 10% operating income margin — that would be a huge improvement, for the past year they’ve had an operating margin of roughly negative 200%, so that might get them closer to break even… though that doesn’t include the interest cost of their debt, or, on the positive side, their one-time sales (like when they offloaded some projects in 2021 to strategic partners).

They’ve been through other strategies in the past, and have been hyped for their biofuels and for their synthetic cannabis by newsletters — I had to check back for the details of some of those pitches, but here’s what I said when Danny Brody was touting Amyris for the new-defunct National Association of Cannabis Investors a couple years ago:

“Danny Brody teases ‘secret stock’ Amyris as a brilliant bioengineering firm, with the ability to use DNA-manipulated yeast to synthesize valuable compounds, including CBD and the lesser-known cannabidiols found in hemp and marijuana plants. That’s true, though Amyris has been around for a long time and their focus has recently been on developing molecules that can be used for health and wellness ingredients, and trying to commercialize its own brands of baby and cosmetic products. They do have a deal with LAVVAN to commercialize synthetic CBD production, though it’s still quite early days and I don’t know what the economics will be… producing the more obscure cannabinoids that seem to be the ‘rare extracts’ Brody is excited about seems much further out in the potential future. To me, the technology is cool but synthetic CBD seems to still be a very early-stage project, the health and wellness stuff is far from being at a profitable scale, and the dozen years of consistent losses deter me from investing (though their failed biofuels project deserves much of the blame for that, and is no longer a focus). Your opinion might reasonably differ, of course, but my first impression is ‘meh.'”

Amyris went on a wild ride in the year after that pitch, going from about $4 to $20, but at this point it again looks pretty “meh” to me. It may be an interesting business, and they do have some growth in their health and beauty products that could turn into something impressive in time… but even though they say they’ve got plans in place to fix what is almost a liquidity crisis, I’m not sure I’d want to bet on the success of their current strategic funding plans. It might well work out, but things are tight enough that I’d be a little nervous. This is still, to me, really a venture capital investment — it could easily fall apart if partners decide to stop funding them.

Here’s how they put it on the quarterly call last month:

“As we continue to focus our business model and portfolio, we expect near-term strategic transactions from the continued simplification of our portfolio to generate over $500 million of value. That includes $350 million in upfront cash, of which the net proceeds we plan to reinvest in our technology and consumer business….

“Our current business performance, current cash, and Fit to Win improvements provide us with the necessary liquidity to self-fund to the closing of our $350 million of expected upfront funding from our large strategic transaction.

“Our strategic transaction regarding the marketing rights of two molecules for $350 million of upfront consideration and up to $500 million of total value remains on track for the fourth quarter. and the fourth quarter is tracking toward another record revenue quarter. The combination of our current growth and operating performance, combined with our Fit-to-Win actions and the successful execution of the strategic transaction enable us to self-fund our growth and deliver on sustained profitability.

“We have no current plans for dilutive financing.”

Down here at $1.70 or so, I’d say Amyris is again a feast or famine idea — maybe they have huge success with their improved production capacity in Brazil and their reorganization and cost cutting, and their new David Beckham line of men’s skin care products takes over the world… or maybe they’re fretting in six months about how to keep the lights on and service their billion dollars in debt. I’m more worried than I am greedy with this one, so I’ll sit on my hands.

Next?

Microcap #3 — Beat Inflation With This Luxury Small Cap

“Beat Inflation With This Luxury Small Cap….

“Luxury goods tend to be a recession-proof industry….

“… this company does something rather unusual.

“It capitalizes on a special niche that is growing in popularity.

“You see, luxury brands like Hermès and Louis Vuitton don’t like to discount their prices.

“They feel it detracts from the products’ cachet.

“Indeed, it’s not unusual to visit a luxury fashion retailer and find that absolutely nothing is on sale.

“However, unsold luxury inventory – like all apparel – must be cleared out eventually.

“And the job generally falls to this company.

“It’s 100% dedicated to discounted luxury fashion.”

What other hints does Alex drop about this stock?

“Annual revenue already exceeds $2.3 billion.

“And it’s growing at a huge 35% annual rate….

“Just like its clothing, this company is trading a huge discount.

“And the stock is trading for less than $10.

“It has huge upside potential and limited downside risk. “

There are quite a few companies who offer curated or secondhand luxury fashion marketplaces, though most of them aren’t tied in so directly to the actual manufacturers — the largest company in this space is probably Poshmark (POSH), which is under agreement to be acquired (by Naver, a South Korean internet portal), and The RealReal (REAL) is similar in size, with a gross merchandise volume approaching $2 billion, so that’s getting fairly close. There are also some companies that are around the periphery of those businesses, like 1stDibs (DIBS), which includes household items and art and is more of a collection of galleries, and ThredUp (TOUP), which is more focused on lower-cost thrift store items.

All of those stocks have looked lousy over the past year, and they’re all quite small now, but the best match here appears to be Farfetch (FTCH), which is a leading marketplace company that partners with actual luxury retailers and producers, not just with secondhand sellers. Here’s how they describe themselves:

“Farfetch Limited is the leading global platform for the luxury fashion industry. Our mission is to be the global platform for luxury fashion, connecting creators, curators and consumers. Founded in 2007 by José Neves for the love of fashion, and launched in 2008, Farfetch began as an e-commerce marketplace for luxury boutiques around the world. Today the Farfetch Marketplace connects customers in over 190 countries and territories with items from more than 50 countries and over 1,300 of the world’s best brands, boutiques and department stores, delivering a truly unique shopping experience and access to the most extensive selection of luxury on a single platform.

“Farfetch’s additional businesses include Browns and Stadium Goods, which offer luxury products to consumers, and New Guards Group, a platform for the development of global fashion brands. Farfetch offers its broad range of consumer-facing channels and enterprise level solutions to the luxury industry under its Luxury New Retail initiative. The Luxury New Retail initiative also encompasses Farfetch Platform Solutions, which services enterprise clients with e-commerce and technology capabilities, and Future Retail, which develops innovations such as Connected Retail solutions.”

Like its near-peers, Farfetch was a hot story in late 2020 and through much of 2021, before the wheels came off of all the “growth” stocks, though they’ve gotten clobbered worse than most, they peaked around $75 and are now down below $5 (they were in the $8 neighborhood until last week, when they offered a very weak outlook and the stock lost a third of its value). They are not expected to be profitable anytime soon, and took a step backwards in that department this year as their revenue flattened out (they lost 55 cents per share last year, and will probably lose a dollar this year). There are definitely still a lot of enthusiastic analysts following the stock, the average price target is in the low teens and there’s quite a lot of commentary about the stock “bottoming out” here, and they do have very strong partners in the luxury space, so it may well work out in the end… if they can begin to eventually generate some profits from their marketplace business.

Farfetch is also a business that has clearly been hurt both by Chinese shutdowns, since China represents a large chunk of luxury consumer demand worldwide, and by the very strong US dollar. We’ll see if their online luxury consumers hold up well during the next recession, but it’s certainly true that the wealthy don’t get hurt as much in a recession as other people, and the business has grown pretty dramatically both in terms of number of customers and number of luxury retail partners, with revenue now up about 10X from where it was five or six years ago, so there’s clearly some potential. Being trusted by the luxury brands is a big deal, since they really don’t like to see their products with that red “on sale” price anywhere.

Farfetch does tend to get early traction with customers through discounting and “outlet” type sales, but that’s not necessarily where the real profits or growth are — for a lot of their customers, they do mostly “full price” sales, they’re just better at retail and fulfillment than a lot of single-brand or niche online stores. And they have seen some real growth as they expand — they made a big deal with Richemont, for example, and that’s expected to really boost their sales of luxury watches and jewelry, getting beyond their fashion retailing core.

The Capital Markets Day presentation they offered last week provides some enthusiasm and hope for future dominance in the sector, even as their outlook threw a little cold water on the near-term growth that investors had been hoping for. Still a story stock, but trading at less than 1X sales is pretty interesting for a marketplace company if they can scale up enough to reach profitability… so it’s probably a more rational story now than it was a year ago.

Right now, FTCH is valued at about 0.9X sales, should end this year with about $2.3 billion in revenue, and is expected to grow that by about 17% next year and speed up growth a little after that — still, at least in the forecasts of analysts, FTCH will be losing as much per share (55 cents) in 2024 as they did in 2021. Margins should improve as they grow, but they’re not improving much yet.

And Farfetch does need things to start looking up in the next few quarters — they’ve been burning $350-400 million in cash per year recently, and they also already carry some debt, so unless things improve in the next few quarters they might be in need of cash late next Summer (they have about $490 million in cash right now, down from $1.45 billion a year ago). They’ve got good gross margins, and with enough scale they should be able to make this business work — but they’re not getting to that scale quick enough right now, not with revenue growth coming down pretty sharply (it was 65, 10% and 2% in the last three quarters, after growth had been well over 50% during the pandemic and near that level in the years leading up to that e-commerce boom period). This should be a telling year — either they get their growth going or they cut their overhead costs substantially (or both), or they’ll have to go begging for capital.

I generally like marketplace companies, which is sort of what Farfetch is, but FTCH is more likely than the peer-to-peer marketplace sellers to get bogged down with pricey inventory, too. Nobody in this space is making money, probably partly because there’s a lot of ecommerce competition in luxury goods, but maybe some success stories will emerge eventually. I can’t convince myself to bet on FTCH at the moment, but I do think they’re making the right strategic moves, and their partnerships are impressive.

Ready for another?

Microcap #4 — “This Booming Small Cap Is About to Take Off”

From the ad…

“This one is a dirt-cheap play on one of the largest private aviation companies in the world.

“The firm is expanding its addressable market by an incredible 900%.

“It just announced record revenue growth of 49% year over year.

“It’s grown membership by 20% this year.

“Even though it’s the leading company in this sector with huge growth, its stock is trading at just $2 a share.”

Private aviation certainly gut super popular during the COVID lockdowns, when folks who could afford it found it appealing to not share their flying tin cans with 200 other coughing souls, and as so many of the “mass affluent” felt very wealthy with their homes, businesses and stock portfolios all rising in value. Things are obviously not quite so cheery for that sector today, but packed airplanes will keep driving those who can afford it to look for better options.

There are a lot of companies with some exposure to private aviation, including big manufacturers like General Dynamics (Gulfstream) and Textron (Cessna), and even our old buddy Warren Buffett got into the game when Berkshire Hathaway bought the private jet-share company Netjets a number of years ago, but none of those would see even a boom year for private aviation really moving the needle. I expect Green is teasing yet another stock that got caught up in the hype cycle last year, the “democratizing private aviation” membership company Wheels Up (UP) that promised it would make it possible for most of us to fly private.

To me, this one of the companies who sells something we wish were available, even if we know in our hearts that it just doesn’t make sense. Not unlike the “too good to be true” movie subscription offered by MoviePass (they’re trying to relaunch with a saner model now, by the way, but they collapsed after their business model of “we’ll buy tickets from theaters for $12 and sell them to you for $10” mysteriously failed the math test and drove them into bankruptcy — I’m just making up those numbers, by the way, but it was something like that).

Here’s how Wheels Up describes itself:

“Wheels Up, the leading brand in private aviation, is the only company in the industry to offer a total private aviation solution that includes world-class safety, service, and flexibility through on-demand private flights across all cabin categories, membership programs, corporate solutions, aircraft management, whole aircraft sales, and commercial travel benefits through a strategic partnership with Delta Air Lines. Wheels Up, which was founded and is led by renowned entrepreneur Kenny Dichter, is uniquely positioned to offer its Customers and Members access to over 1,500 safety-vetted and verified aircraft.

Through the Wheels Up App anyone can search, book, and fly. Wheels Up Connect, Core, and Business memberships provide enhancements such as flight sharing, empty-leg Hot Flights, Shuttle Flights, Shared Flights, signature Wheels Down events, and exclusive member benefits from preeminent lifestyle brands. The Company’s ongoing Wheels Up Cares program aligns with philanthropic organizations and initiatives that affect and matter to the Company and its Customers, Members, stakeholders, families, and friends. The Wheels Up Cares fleet is comprised of five custom painted Beechcraft King Air 350i aircraft; each plane serves as a flying symbol for a specific cause.”

And it’s not $2 a share anymore… UP is, well, down, it has fallen to about $1 per share now. Growth has slowed a little, they had 49% year-over-year revenue growth last quarter, with 20% “active member” growth, as teased, but those numbers came down down to 39% and 12% in the third quarter. They’ve been growing, but they’re also becoming less efficient as they grow, with their contribution margin dropping, and with their Adjusted EBITDA getting more negative (they lost $45 million on $420 million in sales last quarter, after losing $24 million on $302 million in sales a year ago). Their prices are rising, probably at least in part due to higher fuel prices, but they’re not proving out the profitability of the model just yet.

Maybe they will. They do have a plan, which involves cost cutting, adding fuel surcharges, and getting more efficient with maintenance and dispatch work, and that leads them to project that they can be “adjusted EBITDA positive” in 2024. They don’t see the improvement happening rapidly in this fourth quarter, though, so the investor excitement about UP getting a new equipment financing deal back in October was short-lived (it was a pricey deal, they’re basically borrowing against their airplanes at 12%) — since UP reported on November 9, the stock is down another 30%.

If you’re looking for a glimmer of hope at UP, it’s the “active members” growth of 12% (or the slightly higher “Active users” number, they seem to have a few users who aren’t technically members) — they do lose money on the average flight, it looks like, but if they can build an active user base that pays a subscripion fee, and gradually get more efficient, it might work out.

Of course, efficiency also brings all the stuff people hate about commercial airlines — shared flights, less flexible schedules, etc. The membership fees are steep, so if they can become a go-to option for more of the mass affluent, or take share from premium offerings like NetJets, maybe it works out someday — a Core member at UP pays a $17,500 inition fee and annual dues of $8,500, and then pays an upfront price per trip that’s “dynamically priced” per hour. Connect members pay a lot less up front ($3K, then $2,500/yr), but don’t get any hourly credit and presumably pay more per flight, they just get preference for booking over non-members.

Does this kind of travel make sense? It seems to me that the short flights on smaller planes might make sense for a lot of well-heeled folks, though any of the options start to get really expensive if you’re dealing with long-haul flights that take many hours and burn lots of fuel.

Not being in quite that tax bracket myself, I haven’t flown privately and haven’t tried any of the various options in this space (mostly fractional ownership or “jet cards”) — but every time I wander through an airport or squeeze into a tiny seat, I must admit to being tempted.

Then I checked the app — I didn’t sign up for a membership, so I’m sure the member prices are often lower, and one big benefit of membership is that paid members can also join a community to share flights with other members and split the cost… but just to give a little ballpark idea of what this kind of travel costs, a round trip flight from Connecticut to Florida for five people would be about $50,000. San Francisco would be about $100,000. Which is roughly 10X what it would cost to fly five people first class on a commercial flight. I don’t have the stomach or the budget to buy first class tickets either, sadly (and especially not for my kids, who don’t suffer enough as it is)… but that sure makes first class sound more reasonable.

The rich are different than you and I, dear friends. Are there enough of them to make Wheels Up become a profitable enterprise? I have my doubts, since everything they do to make it more efficient is going to make it less appealing to wealthy travelers, but private aviation has been around for a long time, and the jet share and membership companies keep cropping up to try to make it work (Wheels Up has grown, in part, by swallowing up a few of those membership companies… but there are many more), so I guess there’s more of a market for this than I would assume. They have made some progress with corporate memberships, which might help, particularly for big companies who want to fly their executives around efficiently but don’t want shareholders to yell at them about having too many private planes (I’m looking at you, Medical Properties Trust (MPW)), but I don’t know if they’ll be able to scale up enough to make this work.

I look at all of these private aviation stories pretty similarly — the only way to make them work is either to keep prices insanely high, which makes them out of reach for most people and limits growth… or to get more efficient and offer flight-sharing and cut costs with less glitzy planes, and that turns off the fancier people and pushes private flights to be more like the commercial airlines that we all hate flying. It’s a high-glamor, capital intensive business, which usually means investors get hosed… or, at least, that they overpay.

And one more…

Microcap #5 — “Sweeten Your Profits With This Tiny Company”

Here’s how Green introduces this secret stock…

“… the last one is a straightforward play on an undervalued company with growing earnings, a dominant market position and a great product.

“It’s that simple.

“In reminds me of Boston Beer back in 2005….

“In 2005, the company sold over 1 million barrels of its popular beers.

“At the time, it was a tiny company with a market cap of just $350 million.

“It was trading for less than $25 a share.

“But anyone who invested in the stock at $25 would be sitting on a 3,700% return by 2020.”

This one isn’t a beer company, but apparently it’s otherwise somehow similar… more from Green…

“And recently, this same scenario happened again.

“I banned sodas for me and my kids many years ago. I am primarily an iced tea drinker.

“About a year ago, I tried a naturally sweetened green tea and was immediately hooked.

“It is hands-down the best tea I have ever tasted.

“I now have a couple cases sent to my house each month.

“And once again… I’m not alone.

“The company has sold over a billion beverages and added over 1 million new households to its customer base last year.

“It’s the fastest-growing natural product in the U.S.

“And its earnings have skyrocketed…

“In the last two years alone, earnings are up 1,379%!

“But the stock trades for less than $5 a share!”

The beverage market has brought us a few barn-burners over the years — Sam Adams was one, though Monster Beverage (MNST) was far more dramatic (depending on your timeframe, that might end up being the “best stock of the 21st century”)… and Alexander Green mentions another one that got a lot of people excited a year or two ago:

“The last time I saw a stock like this was back in 2019…

“The tiny soft drink company Celsius had a market cap of just $330 million.

“Its stock traded for under $5 a share in October 2019…

“And in just two years, it jumped to $95 a share… a gain of over 3,000%!”

Celsius Holdings (CELH), sells a new variety of energy drink… and that stock has actually survived the carnage of 2022 pretty well. It did dip this year, but has recently roared back to near all-time highs again, with a still very lofty valuation (16X sales, not quite profitable, close to 100% revenue growth recently). Celsius is an $8 billion company now, so that’s nobody’s idea of a “microcap” — what’s Alexander Green pitching now?

Thinkolator sez he’s very likely touting Zevia (ZVIA) here — that’s a little company which went public in mid-2021 on the strength of growing sales for their stevia-sweetened natural sugar-free sodas. They’ve been around for a very long time, about 15 years, but there is some hope that they’re now beginning to break through into new areas, including tea and energy drinks, and steadily improving distribution. If they happen to get it right and catch lightning in a bottle with one of their products, it could get exciting — but the odds are probably pretty low (the real daydream is still finding another Monster, and there are some thematic similarities — Monster was a natural juice and soda company called Hansen, selling mostly in natural foods stores for 70 years before they developed the Monster Energy drink in 2002, and saw it become the focus of their company… and MNST stock has so far returned about 150,000% since they started selling Monster Energy).

How do we match the clues? Well, Zevia did indeed get named as the “fastest growing natural product” in the U.S., though that was earlier on in their growth, when they were just beginning to sell in volume and stevia was just getting approved as a food additive and sweetener (2008 or so). It’s still very fast-growing, it was taken over by current management in 2010, with a growing focus on distribution and building out the brand portfolio, and they’ve had a good decade (there was a good article about new food startups in the NY Times back in 2015 that higlighted Zevia)… but I don’t know if they’re currently the fastest-growing natural product.

And they do talk in terms of “households” — they say they have 6.3% household penetration in the US, and have added 1.3 million new households in the last twelve months, so that matches Green’s “over a million new households” hint. And part of their marketing material at the IPO last year was that claim that they had sold “over one billion cans” of Zevia. Presumably that’s at least 1.1 or 1.2 billion by now, given that they’re adding more than a million customers a year (they sell in 6-packs or 10-packs, mostly), but the big round number sounds more impressive. Maybe they’ll wait to update it after they exceed two billion.

Why might Zevia not be the answer? Well, I’m wracking my brain but I can’t see where Green gets the “1,379% earnings growth” number from over the past two years. Zevia isn’t profitable, so they don’t have any earnings, and none of their real numbers have grown at anything like that clip. The earnings number has actually risen by close to 1,379% from where it was two years ago, well before they went public — but in both cases they’re negative numbers, so it’s not actually growth.

What’s to like? Well, it’s a consumer product, sold mostly in grocery stores and warehouse stores, and they are expanding their distribution and raising prices a little bit, with most of that price increase coming at a lag and not yet impacting the income statement (they work through distribution and big customers, so raising prices takes months). They’re now growing fast enough, and are large enough, for some “optimization” initiatives to have some impact on the numbers — stuff like improving the efficiency of their packaging and freight, managing inventory a little better, those boring things that aren’t part of building a brand but are part of making it profitable.

Zevia right now is really a “healthier soda” brand, and one that sells at an unusually low price point, so that might help it if people are becoming more value-conscious with inflation and rising economic stress, but they do indeed, as Green noted, also sell a variety of energy drinks and teas, and those are both better growth categories than traditional soda, and have somewhat higher price points. Zevia products are still often lower-priced than a lot of bottled waters, so they have room to grow if the perceived value of the brand improves.

They went public at $14 and shot a little higher for a little while, briefly topping $18 during the mania of 2021, and they raised a net of about $80 million at the IPO (the rest of the $140 million in shares they sold went to buy out insiders and institutional investors). It’s still a bit of an odd business structure, since the public company (Zevia PBC) only owns 53% of the operating company (Zevia LLC), and it does have a broader social mission, not unlike Lemonade or Patagonia (like those two, Zevia is a “certified B corporation,” with their mission primarily focused on reducing excess sugar consumption — even if you don’t like ESG-type investments, that’s a pretty clean match for their business. I don’t know whether the B-certified stuff is a marketing boon for them, but it might well help attract customers.)

Zevia’s sales are somewhat seasonal (canned soda and tea sales are strongest in the warm months, which is the second and third quarters in the US), but my first look at the financials indicates that there are signs of hope — particularly in the fact that they effectively didn’t burn any cash last quarter. The third quarter was a little disappointing relative to analyst expectations, and growth this year has been slower than last year both on the top line and in terms of gross profit (mostly because of the lag in passing through inflated costs for aluminum and ingredients and transportation), but it was effectively a “break even” cash quarter (they lost $7.5 million, but it was all stock-based compensation, they still have about $50 million in cash, as they did the quarter before).

The stock has come down quite a bit this year, both because investors are less willing to pay for growth and because the growth has slowed down — they started out 2022 estimating that they’d have net sales of about $180 million, and they’ve been revising that downward and now expect net sales of about $160 million. That’s still growth, but it’s more like 15% growth, not the 30% growth they had during the pandemic. I see some meaningful potential for Zevia to reinvigorate their growth a bit and improve their margins, both because there’s room to raise prices (they’re still much cheaper than most of the competition) and because they’re improving their product mix, with more teas and energy drinks, and focusing on promotion and extending their reach, especially on the East Coast, which is their weakest market (they do have national distribution, and have had for years, with real strength in Whole Foods and other natural foods stores and improving “regular” grocery store and warehouse club distribution, but that doesn’t mean it’s spread evenly… looks like they’ve got much better sales and more of a presence in their home market in California than they do in New York or here in Massachusetts).

And who knows, maybe that lack of exposure in the Northeast is part of the reason for a little bit of skepticism and a weak share price — analysts and investors are professionals and are paid to foresee the future, but they’re also human beings who go to the grocery store, and the majority of them are still in New York. If the New Yorkers aren’t as likely to see Zevia when they shop, perhaps it gets a little bit less brand presence for investors. That kind of regional bias can impact stocks, though often to a very minor degree (we’ve seen it with “rural” stories like Buckle or Tractor Supply in the past… don’t know if it will also play out for more “west coast” stories like Zevia).

For me, this one comes down in the “interesting and worth watching” category, I do like a growing brand with improving distribution, and they’ve so far shown that they have room to pass through inflation and have a loyal customer base. That’s impressive. Whether they can double or triple in size from here over the next few years is an open question, and it depends in some meaningful degree on customer enthusiasm for the product — so far it looks solid but not at risk of becoming a blowout growth story, so maybe I’ll look around and try a few of the products before I get deeper into the financials. I’m more of a seltzer guy, so I don’t really need to cut down on sugar in that category, and I haven’t exactly been enthusiastic about stevia-sweetened products in the past, but it’s worth a try.

If you’ve got feedback on Zevia, as a product or as an investor, feel free to chime in with a comment below. Likewise, if you’ve got a better answer for that last microcap, feel free to let me know — it’s OK, I’m willing to be wrong once or twice a year, I won’t yell at you.

And, of course, if you have an opinion about any of these other beaten-down microcaps, and see potential for them to grow again, we’d like to hear that, too — it’s your money, so you get to make the call, but we can help each other by sharing opinions. Delighted or disgusted by Wheels Up, Zevia, Farfetch or Amyris? Prefer Green’s #1 pick of Absci? Let us know with a comment below. Thanks for reading!