Two companies with too much demand

February 28, 2021

The last two weeks have seen a return of volatility in the markets. New optimism around the vaccine rollout has seen money going into companies that should benefit from the re-opening of the economy. It’s also seen a decline in many of the tech stocks that have done so well over the last few months. As always, it’s important to retain a long term view with your investments.

This week, I discuss two companies that have been suffering from over demand and limited capacity. Good problems to have I say


Thesis - Freshpet manufactures and supplies organic, refrigerated pet food. Founded in 2006, their mission is to make better, healthier food for pets. They research the products, create the recipes and cook the ingredients in-house. They own and operate the refrigerated distribution to their retail suppliers. Their retail partners include some of the biggest names in the US, such as Walmart, Target and Whole Foods. Within these retailers they place a branded refrigerator that only stocks their products. This is a straightforward business, that offers a loved product in a growing segment of the pet food market. Freshpet takes advantage of two trends; the increasing preference for organic and unprocessed food and the continued humanisation of pets. Since 2018, the company value has increased by almost 10 times.

Financials & Performance - Freshpet has accelerated annual revenue growth for 5 consecutive years, from 14% growth in 2016 to 30% in 2020. Annual revenues are now at $318m. This year, the company was unable to keep up with demand, due to covid-related disruption and higher-than-expected demand. They are aggressively expanding their production capacity through expansion of their factories and increased automation, such that they can better meet demand in the coming year. Such was the confidence of the management team, they revised upwards their expectations of growth. They are now targeting revenues of $1.25b in 2025, having previously guided for $1b. They also increased their expectations of household penetration from 8m to 11m in 2025. Each year, they expand their store count, and are now in 22,716 stores. They also have impressive buying behaviour amongst individual customers, with each customer increasing the value and frequency of purchases year on year. If the company can successfully increase capacity to better match demand, they have shown they can execute in all other ways and have a strong growth story.

Leadership - The leadership team contains an array of seasoned executives. The company was founded by Scott Morris and Cathal Walsh, who met whilst working at Nestlé Purina, the pet food subsidiary of Nestlé. They partnered with Richard Thompson, who served as CEO from 2010-2016, who helped grow the retail presence of the brand and took the company public in 2015. Richard had previously been CEO of Meow Mix a successful pet food brand that merged with Nestlé Purina. Scott Morris currently serves as COO and President and they have hired Billy Cyr as the latest CEO, who has previously been CEO of Sunny D (of Procter & Gamble). This web of pet, product, marketing and retail specialists have all the skills to grow the brand.

Opportunity - Clearly, the current capacity problems are a challenge. They need to improve this so that the products are available when retailers and customers need stock. Of all the problems to have, too much demand seems a good one. Freshpet also use the health aspect of organic, fresh foods in their story, but there is no scientific evidence (yet) to suggest pets actually benefit through increased lifespan.

freshpet growth


Update - In the last two weeks, the market has seen large amounts of money leave the stocks that benefitted during covid to names that should benefit during a re-opening of the economy. One casualty of this has been Peloton, which has seen its stock drop by almost 30% from its highs. Like Freshpet, Peloton has suffered from capacity issues. The growing brand has had such strong demand that waiting times for its products have increased. They continue to expand their production capacity, in particular looking to expand production within the US (home factories). They acquired Precor for $420m. Precor is an incumbent in the market that offers gym equipment across a large range of commercial properties (think hotels, etc). Through the purchase of Precor, Peloton will get access to 625,000 square feet of manufacturing capacity within the US. They will also offer the Peloton experience across the commercial sites (exactly how, more details to be supplied).

In the meantime, Peloton has continued to announce excellent growth numbers. Total revenue grew 128% and is now over $1b for the quarter. Connected subscriptions grew 134%. Churn held at 92%. Average monthly workouts of 21.1. Whilst this company may see some slowing down as gyms re-open, it has capitalised on the opportunity it was given and grown its brand and community significantly. Even with the 30% decline, the company is still up 55% from when I first mentioned it in edition 7 of the newsletter (6th September). So this stock is still in an uptrend over the course of the year. If this stock was on your watchlist, the current dip might be an interesting buying opportunity if you have a long-term mindset.

peloton stock price

Written by Stevan Popovic, growth investor, web developer and founder of this site.