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Naked Brand Stock Forecast: What To Watch For Going Into 2022
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.
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Perhaps more than any other stock, Naked Brand Group ( NAKD ) stock epitomized the market of 2021. NAKD, of course, was one of the so-called 'meme stocks' that soared in January along with GameStop ( GME ) and AMC Entertainment ( AMC ). After a massive rally from a share price of $0.07 in November 2020 to a January high of $3.40, Naked did what so many of its peers did: dump copious amounts of stock directly and indirectly to retail investors.
With the cash from those sales - which totaled well past $200 million - and the divestiture of its legacy Bendon lingerie business, Naked Brand Group became a de facto SPAC (special purpose acquisition company). In November, like a number of actual SPACs, the company then agreed to merge with an electric vehicle manufacturer, in this case Cenntro Automotive. After an initial pop , the market responded to NAKD the same way it did to most SPAC and EV plays in the fourth quarter: it ran for the hills. NAKD closed Tuesday at an 11-month low of $5.01 ($0.334 split-adjusted; the company executed a 1-for -15 reverse split this month), more than 60% below the post-merger peak. The only thing missing from NAKD this year was some kind of cryptocurrency or non-fungible token, and to be honest it's difficult to see how management missed that potential opportunity.
It has been an extraordinary year, and to be fair, still a profitable one: NAKD stock has still gained 74% so far in 2021. 2022 should be quieter, at least on a relative basis, as Naked becomes Cenntro Automotive. But the nature of that business suggests some noise and volatility remains, and even at the lows there are reasons to believe that the broader trend can stay negative next year.
With so many moving parts, it takes a bit of time to understand the precise valuation assigned the company once the merger closes this week. According to an SEC filing last week, after the reverse split, Naked Brand Group will have 68 million shares outstanding . But just ahead of the merger, NBG also closed a $20 million financing which includes the sale of stock as well as warrants that were automatically exercised when the merger closed. It's not clear whether that financing is included in the total share count; it seems at least possible that the count incorporated the shares sold (an event which occurred prior to close) but not the exercised warrants (which were exercised contingent on that close).
In that model, NBG likely has ~71 million shares outstanding at the moment. But Naked Brand Group will own only a portion of the combined company: just 24.5% , as estimated in a November proxy statement.
The current price of $5.01 thus values Naked's stake at around $355 million, which creates a pro forma market cap for Cenntro of about $1.45 billion. Naked of course is contributing cash; the merger required a minimum of $282 million, and the $20 million SPA plus yet another at-the-market offering appears to have moved Naked Brand Group modestly above that level.
All told, the $5.01 share price for NAKD stock seems to imply an enterprise value for Cenntro of about $1.15 billion. Bear in mind that, going forward, Cenntro is the entirety of the business, as the legacy Frederick's of Hollywood e-commerce platform will be divested, according to the prospectus. Current Naked chief executive officer Justin Davis-Rice will depart, with Cenntro founder and CEO Peter Wang taking over the combined company.
So the question right now for NAKD stock is whether Cenntro merits that ~$1.15 billion valuation. On its face, the answer seems potentially positive. Unlike many EV peers, Cenntro already has entered into production, with 3,300 vehicles delivered as of June 30 and an estimated 20 million miles traveled, according to the merger presentation .
Meanwhile, Cenntro sees explosive growth over the next two years, with a projected $2.1 billion in revenue in 2023:
source: Naked/Cenntro merger presentation, November 2021
The company has its own SoC (system-on-a-chip) for autonomous driving, and its Metro model reputedly was the first EV to use a modular concept . The likes of Arrival ( ARVL ) and Canoo ( GOEV ) have since followed its lead.
On both an absolute and relative basis, a $1.15 billion valuation for an EV manufacturer seems cheap. Even after a sell-off, Rivian ( RIVN ) has a market capitalization above $90 billion. Closer to Cenntro's end markets, Arrival is over $5 billion. Even Canoo, which discarded much of its strategy almost immediately after its own SPAC merger closed, has a higher enterprise value than does Cenntro on a pro forma basis.
Meanwhile, that 2023 revenue target leaves Cenntro valued at barely 0.5 forward sales. As the companies noted in November, that's one of the cheaper multiples out there:
source: Naked/Cenntro merger presentation, November 2021
Only Lordstown Motors ( RIDE ) is in the same ballpark, and to be blunt, that company is a mess right now.
So there appears to be a solid case for NAKD stock heading into the merger, with the sharp sell-off of the past few weeks potentially unfounded. But the key word there is 'appears'.
The catch at the moment is that Cenntro isn't quite as impressive as some of the headline numbers might appear. Yes, Cenntro has produced 3,300 vehicles so far - but those deliveries are all of the Metro model. That model can be and is used on-road, but appears better suited for gated communities, campuses, and the like. It's hardly a vehicle that will transform last-mile delivery.
And it's not as if the Metro has been a big seller. According to the prospectus, Cenntro's revenue in 2020 was just $5.5 million. And while the company is projecting $25 million this year, first-half sales totaled only $2.5 million.
The narrative that Cenntro is an established EV manufacturer seems somewhat overblown. Rather, the story here seems somewhat like that of Electrameccanica Vehicles ( SOLO ). Electrameccanica sits on the consumer side of the space, but like Cenntro it makes vehicles which happen to be electric, rather than targeting the broader EV market that has driven so much investor optimism.
In that context, it's difficult to necessarily see NAKD stock as cheap even at the lows. We've seen already what value SPAC projections have, and as such the $2.1 billion revenue forecast for 2023 needs to be taken with an entire shaker of salt. The fact is, that even down so sharply from November highs, the current NAKD stock price still values Cenntro at more than 40x its projected revenue for this year . Even that $25 million figure looks potentially aggressive, given first-half performance and the likelihood that estimates rest on Cenntro's new models.
The simple fact is that Cenntro still has a substantial amount of work left to do, because at the moment there isn't all that much here.
But it's important to understand that Cenntro does have some potential. The cash infusion from the merger should give it a long runway: operating losses totaled less than $30 million in 2019 and 2020 combined (again according to the prospectus). And while the Metro itself probably cannot support a billion-dollar valuation, new models are on the way.
The first delivery of its Logistar 200, a European-focused delivery van, shipped this week. Along with that announcement, Cenntro reiterated guidance for at least 20,000 deliveries in 2022 - a full 6x its total to date. The November merger presentation projected just over 21,000 deliveries in 2022, which would underpin just over $500 million in revenue. Hit that bogey, and Cenntro's current valuation is ~2.3x sales - a seemingly attractive multiple given presumed Logistar 200 growth as well as contributions from the Logistar 400, the Neibor 200 micro-truck, and a planned off-road vehicle.
Meanwhile, the space will be competitive, but it's not as if rivals are setting the world on fire. Canoo, Workhorse ( WKHS ), and Arrival all have disappointed to at least some degree and none have established clear leadership. There's a clear opportunity for Cenntro as new models launch.
And so the near-term case for Naked and Cenntro seems relatively simple: if the company can hit its 2022 targets, or at least come close, the current price is a buying opportunity.
Given that Cenntro remains, for the moment, a private company, investors simply don't have that much information with which to judge its ability to post a strong 2022. Rather, like so many traditional SPACs, there's a bit of a 'feel' aspect, and no obviously correct answer at the moment.
Again, Cenntro has an opportunity. And there is an argument that the simple risk/reward here makes what will be Cenntro stock at least intriguing. Downside here is capped at 100%, and barring an absolute disaster that level of downside won't arrive in 2022 or even 2024. But the upside in a best-case scenario quite obviously is far, far higher than 100%.
The flip side, however, is that the same risk/reward has existed in the overwhelming majority of so-called de-SPAC mergers. Few of those cases have paid off so far; it's clear that many are going to wind up as zeroes. And there isn't much evidence to suggest that Cenntro is an outlier.
Instead, there are real questions. Cenntro clearly was looking to go public and raise capital, given the nature of this deal and the requirement that the merger raise a minimum of $282 million. Yet, a year ago, in a market awash with SPAC capital, with retail investors clamoring for EV plays, and a couple of hundred sponsors looking for deals, Cenntro couldn't find a more traditional SPAC pathway. That's perhaps not quite a red flag, but certainly a yellow one.
And even after the sell-off in NAKD stock, the market still is valuing the stake at what seems to be a 20%-plus premium to the cash Naked Brand Group is contributing. Given Naked's missteps heading into January 2021, and the relative lack of acquisitions experience among senior management and the board (Naked did add one M&A-focused director, to be fair), that premium doesn't necessarily seem deserved.
Owned technology here doesn't appear to be all that substantial: aside from the SoC, Cenntro's model countenances not just third-party parts but third-party assemblers. Even U.S. sales appear to run through a distributor, Tropos Technologies.
Even though Naked isn't technically a SPAC, the story here seems like so many beaten-down SPACs at the moment. The opportunity is still there, and the price is cheaper - but the sell-off seems to have some logic behind it. In this case, it was the collapse of the 'meme stock' momentum behind NAKD, which crushed the premium to cash the market was assigning the stock.
That doesn't mean the story can't work. But it does mean, again, that there's still a long way to go. The NAKD stock price is cheaper, but it's going to take a strong 2022 for Cenntro for a $5 price to actually be cheap.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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December 22, 2021, 6:34 PM · 3 min read
Lingerie on a pink background representing NAKD stock.
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Naked Brand (NASDAQ: NAKD ) stock is in the news today as investors react to the company’s reverse stock split for Tuesday.
Source: NazarBazar/Shutterstock.com
That reverse stock split saw the company consolidate 15 shares of NAKD stock down to one share . The goal of the split is to get its share price up to where it needs to be for the Cenntro Automotive merger.
A recent shareholder meeting saw investors in NAKD stock vote in favor of the split and the merger. If all goes well, Naked Brand is expecting the deal to close before the end of the year.
Let’s dive into what traders are saying about the reverse stock split below!
$NAKD predicted the split few days ago..down it goes to $1 again.. 💟 pic.twitter.com/4pwM5Ikhbm
— Anatoliy Poliakov (@poliakovdev) December 22, 2021
They've been talking about a $NAKD reverse split for months and specifically a 1/15 split for the past week, but people were still shocked waking up and thought it was squeezing. Know the stocks you invest in. I'm patient and will continue to hold.
— TPell17 (@TomPell17) December 22, 2021
$nakd and the assault continues. it's price is really $0.40. the split was just trickery to get ur hopes up.
For me reverse split is a bad news. Yesterday $NAKD closed at $0.4825 so If you divide current price of $6.88 by 15 shares of reverse split then its around $0.4586, which is less than yesterday's closing price and it'll likely to dip further during trading hours. https://t.co/M9A35h8ajO
— Flying_Trader ✈✈✈ (@Nasimul1978) December 22, 2021
$NAKD so what recourse does the retail investor have, we can’t buy or sell if we wanted to since most retail apps have not yet reconciled with the reverse split? Wouldn’t you think it would be the job of the sec to be making sure this reverse split goes off smoothly?
— David Gray StockWatch (@Davidgray090) December 22, 2021
While investors approved the NADK stock reverse split, it isn’t performing so well now that normal trading hours are underway. Currently, the stock is sitting 17.1% lower than the $7.23 it was boosted to by the reverse split.
While NAKD stock is slipping today, it’s possible we could see shares rise higher in the coming days. That would be especially possible if it announces the close of its merger with Cenntro Automotive before the year closes out. As such, expect volatility from NAKD in the coming days as investors prepare for that announcement.
Investors seeking other stock market news today are in luck!
There’s plenty to talk about besides NAKD stock and we’ve got it all in one place! A few examples of that include this morning’s biggest pre-market stock movers, what happened with Cassava (NASDAQ: SAVA ) shares yesterday, as well as the latest news on Bakkt (NYSE: BKKT ) stock. You can find all of that info at the following links!
On the date of publication, William White did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .
With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com ’s writers disclose this fact and warn readers of the risks.
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