This plant-based food company is capitalizing on global megatrends; but is it a fad, or will this company be the next big food giant?
Tattooed Chef (NASDAQ: TTCF) is a plant-based food company that went public through a special purpose acquisition company (SPAC) in 2020. The brand is tapping into growing healthy eating and plant-based food trends. In recent years, investors have witnessed the decline of giants of the food industry such as The Kraft Heinz Company and with changing consumer tastes, is Tattooed Chef a good investment?
The bull case for Tattooed Chef stock:
Tattooed Chef offers a range of 38 plant-based options as of December 2020, with plans for expansion to 62 in 2021. Long-term, it plans to have over 200 products along with entering new areas such as desserts and family meals. The company sells its products under both the Tattooed Chef brand and private label in approximately 4,300 stores, including Walmart and Costco. Management is confident that it will meet its objective of being stocked in 10,000 stores in 2021.
Tattooed Chef targets a growing plant-based market set to grow from $13.5 billion to $35 billion in 2027. ‘Millennials’ and ‘Gen Z’ are also helping to drive growth due to the convenience of its products. It estimates its current total addressable market to be $33 billion with a further $12 billion opportunity in the near term in the desserts category.
One of the key competitive advantages is that Tattooed Chef is vertically integrated with production facilities in Italy and the U.S., where capacity doubled in 2020. It has continued to keep up with increasing demand and can bring a product from the concept stage to the shelf within three months. The ability to spot trends and innovate will be crucial to its success in the future.
In 2020 revenue increased to $148.5 million, 74.9% year-over-year (YoY), and net income reached $68.7 million, compared to $5.6 million in 2019. Its branded products make up an increasing portion of revenue, increasing 363% YoY, making up 57% of revenue compared to just over one-fifth a year prior. Management expects this trend to continue and reach a split of 75-80% over the next 2-3 years. Tattooed Chef also has approximately $200 million on the balance sheet, which it will continue to re-invest in the business. These impressive financial results are without marketing which commenced in January 2021.
In an analyst day presentation in December 2020, management stated that it expects revenue to grow to $500 million by 2023 and $1 billion by 2026. This forecast would represent a compound annual growth rate in revenue of approximately 39%.
Tattooed Chef CEO Sam Galetti has over 35 years of experience in the food industry. He hired his daughter Sarah Galetti in 2014 as a Creative Officer, and she has been instrumental in launching the Tattooed Chef brand. Sam Galetti and his family own roughly 50% of the business, meaning that their interests are aligned with shareholders.
The bear case for Tattooed Chef stock:
Tattooed Chef is a small-cap company with a valuation of roughly $1.5 billion, increasing the likelihood of volatility
The nature of the food business means that the margins are low, and in 2020 its gross margins were 15.9%, which could compress if larger players were to enter this market in a meaningful way. Whether consumers will be willing to pay a premium for Tattooed Chef products to maintain these margins is unknown.
In fiscal 2020 its three largest customers accounted for approximately 88% of total revenue, decreasing from 95% in 2019. This customer concentration is a concern as if it were to lose one of these, it would significantly impact revenue.
So, should I buy Tattooed Chef stock?
It is still early days for the company, and there is a significant risk. The early signs are promising as it continues to meet its objectives, and for an investor with a high-risk appetite, it could be a good buy.
Where is Tattooed Chef headquartered?
It is headquartered in Paramount, California, United States.
Does Tattooed Chef pay dividends?
No, and it is unlikely to in the foreseeable future.
Is Tattooed Chef profitable?
Yes, it reported a net income of $68.7 million in 2020.
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