Is This The Steal of The Century?

Imagine I hold up $100 and offer it to you for $95, would you take the deal? At face value it’s a sure bet, but you would probably be wondering what the catch is? Is the Benjamin Franklin note real or fake? Are you about to make $5 or lose $95? Well, that’s the same trade-off to make when investing in a company that trades below cash value, and we have just uncovered one.

Back in 2009, it wasn’t unusual to find a company with a market capitalization below the balance sheet cash value. Fear was so palpable in the market at the time that even when an apparent deal was a buy transaction away, few took the opportunity to scoop up the bargains. Since then, few similar opportunities have presented but one has just cropped up. And as you’re about to find out, the tension between greed and fear is real.

Let’s peel back the layers of the onion and explain the pros and cons of a footwear company that might be the steal of the century.

Key Points

• Allbirds’ market cap is $97.9 million, below its cash reserves of $102.1 million.
• Facing competition and mounting losses, Allbirds’ share price has fallen substantially.
• High cash burn and falling sales make Allbirds a speculative gamble with the potential for both high reward and significant loss.

Deal or No Deal?

First, a short history of Allbirds. When the shoe company came public it was with much fanfare. In no time, the market capitalization soared to $3 billion as celebrities endorsed the shoes as the most comfortable in the world. Whether it’s the sustainable sourced wool from New Zealand sheep or the manufacturing and design of them, what is clear is they were a hit with the public.

But soon worries grew that Amazon was going to introduce a competitor shoe at a much lower cost. How could Allbirds possibly compete? The share price started to decline as it became clear that losses were mounting and cash was evaporating to sustain operations.

Fast forward in time and Allbirds market capitalization is now trading at below cash value. To be more precise, Allbirds has a market cap of $97.9 million and cash on the balance sheet at the end of last quarter of $102.1 million. So, is it time to buy?

Time to Buy?

Like the $95 example in exchange for $100, you have to wonder what the catch is with Allbirds. And where the deal gets more nuanced to evaluate is the level of cash burn.

If Allbirds is going to burn through its $100 million cash hoard, it’s arguably no deal at all to buy it below cash value now. And there are other headwinds, too. For example, analysts have estimated that sales will decline this year, which will further hurt the bottom line. The company has had a string of losses over the past 3 years in each consecutive quarter, and there are no signs of a turnaround soon.

Whether you look at cash flows, price momentum, growth or profit health, the numbers all look poor for Allbirds. But like in 2009 there is one thing that cannot be denied, the cash value on the balance sheet now eclipses the market capitalization so the entire operations of the company are essentially being valued at less than zero.

If you think there’s an opportunity for a turnaround at some point, Allbirds is as good a buy now as ever, it seems. But speculators beware, a stock down 99% can still fall another 100%, so this is very much a gambit where the winner may take it all but equally the loser may lose it all.