Goodfood Market (TSX:FOOD) has taken the Canadian meal-kit delivery market by storm. I’ve been pounding the table on FOOD stock over the past year, noting of profound pandemic tailwinds that the company would benefit from. A 350% surge later and Goodfood stock still seemed undervalued with a price-to-sales (P/S) multiple of around just two.
While the stock could take a big breather after its unprecedented rally, Canadian growth investors should add the name to their radars and be ready to back up the truck, as shares fall back to earth alongside most other high-tech stocks that have benefited from the pandemic as well as the new normal environment in which we find ourselves.
In a prior piece, I highlighted that Goodfood stock as a terrific defensive growth bet for those looking their hedge their portfolios against a lengthening (or worsening) of this pandemic.
“Goodfood, which has been doing its part to get necessities to Canadians, recently clocked in a quarterly profit for the first time in its history, and the longer this pandemic drags on, the better the intermediate-term growth prospects for the online grocery firm, as subscribers look to fill up their digital baskets to reduce the number of trips to the crowded local grocery store,” I wrote in a prior piece, praising Goodfood as one of my two top picks for the new normal.
Churn may be a cause for concern
Just because Goodfood stock is cheap doesn’t mean it doesn’t pose risks, however. Most notably, the stock could surrender a considerable chunk of the gains it’s posted over the coming months on the advent of a vaccine, which could spark a rotation out of pandemic-resilient tech and grocery companies.
After this pandemic ends, people will probably still be reluctant to go venture into the crowded grocery store’s narrow aisles. Should Goodfood’s margins continue to improve, though, I wouldn’t be surprised if the company takes a margin hit to further improve upon its value proposition by lowering prices to improve its customer retention rate.
If Goodfood can improve upon its customer retention, the stock could prove to be severely undervalued
It seems pretty absurd that an early-stage growth company with a front-row seat to a lucrative market is trading at just 1.7 times sales. Undoubtedly, the stock looks to be discounted because its high double-digit growth rate may not be viewed as sustainable.
While there’s no question that this recent bout of pandemic-driven momentum will eventually grind to a slowdown, is it so far-fetched to think that Goodfood will be capable of high double-digit top-line growth in a post-pandemic world?
I don’t think so. The company is priced as though it’s destined to become a stalwart sometime soon and feel the firm’s multiples could stand to expand once should the company continues proving the doubters wrong.
I’ve heard many millennial consumers arguing that meal kits are too expensive to become habitual. In times of quarantine, the inherent value to be had from meal kits is that much higher. But under normalized conditions, it’s clear that meal kit firms like Goodfood may need to take a gross margin hit to improve its value proposition further and retain existing subscribers, as churn, I believe, remains the biggest concern.
You can offer free meal kits for subscribing or renewing subscriptions all you want, but at the end of the day, there’s not much stopping many consumers from hitting the “pause” button after they receive their discounts.
Fortunately, the Goodfood’s margins are on the uptrend. With various grocery items that expand beyond meal kits (think smoothie mixes, breakfast products, organic foods, etc.), I believe the company could grow to become an even more dominant force in the Canadian grocery delivery scene if management chooses to sacrifice near-term profitability for longer-term top-line growth.
At less than two times sales amid a pandemic, Goodfood stock is a strong buy in my books. If the company is willing to take a gross margin hit to improve upon its value proposition further, the stock easily looks like it could double again.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Goodfood Market.