Heightened Skepticism Will Erode Beverage Pricing Though Retail Gains Persist

Key Takeaways

• Rising consumer skepticism of sweeteners and the shift toward functional beverages threaten Zevia's brand relevance and future sales growth.
  
• Reliance on major retailers, high expenses, and potential consumer trade-down behavior expose Zevia to margin pressure and uncertain profitability.
  
• Strong brand investments, expanded distribution, and alignment with health trends position Zevia for increased market share and sustainable long-term growth in the better-for-you beverage sector.

Catalysts

Develops, markets, sells, and distributes zero sugar beverages in the United States and Canada.

• Rising consumer scrutiny of natural and healthy beverage claims may undermine Zevia's brand messaging, especially if there is increased skepticism about zero-calorie sodas using sweeteners like stevia, which could limit the company's ability to sustain premium growth and result in dampened long-term revenue expansion.
  
• The accelerating shift in consumer preference toward functional beverages with adaptogens, added nutrients, or probiotics threatens to divert wallet share away from simple zero-calorie sodas, risking demand stagnation for Zevia and pressuring future sales growth.
  
• Persistent negative net margins, ongoing high marketing and distribution expenses, and the company's reliance on productivity initiatives for profitability improvements highlight a fragile path to sustainable earnings, especially as future operating leverage is not assured.
  
• Zevia's dependence on a handful of large retail partners and ongoing necessity for promotional activity to secure shelf space increases vulnerability to potential delistings or retailer-driven price pressure, which could disrupt top-line revenue and compress margins if relationships weaken or competition intensifies.
  
• Heightened macroeconomic volatility may prompt consumers to trade down from premium-priced better-for-you brands like Zevia to lower-cost alternatives, restricting the company's ability to increase market share or pricing power and resulting in long-term pressure on both revenue and earnings growth.

Zevia PBC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Zevia PBC compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Zevia PBC's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Zevia PBC will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Zevia PBC's profit margin will increase from -9.1% to the average US Beverage industry of 11.9% in 3 years.
• If Zevia PBC's profit margin were to converge on the industry average, you could expect earnings to reach $22.6 million (and earnings per share of $0.25) by about August 2028, up from $-14.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from -15.4x today. This future PE is lower than the current PE for the US Beverage industry at 26.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Zevia PBC Future Earnings Per Share Growth

Risks

• Zevia has demonstrated strong double-digit top-line growth, fueled by successful expansion in both distribution and product innovation, which, if sustained, could support increasing revenues and long-term market share.
  
• The company's first profitable quarter as a public company and ongoing productivity initiatives, already resulting in $15 million of annualized savings with an additional $5 million identified, may drive improved net margins and support a path toward sustainable earnings growth.
  
• Enhanced brand investments, such as the national Get the Fake Outta Here campaign, have significantly improved consumer engagement and awareness, which may strengthen Zevia's pricing power, customer loyalty, and revenue trajectory in the long run.
  
• Expansion into new channels, including successful placements at Walmart, Costco, and all three national drug chains, as well as rising visibility in the convenience segment, points to growing shelf presence that could boost sales velocity and earnings as distribution scales.
  
• The better-for-you beverage category continues to experience favorable secular trends, including heightened consumer health consciousness and regulatory pressure on sugary/artificial drinks, which aligns with Zevia's brand positioning and could expand its addressable market and support future revenue growth.

Valuation

• The assumed bearish price target for Zevia PBC is $2.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Zevia PBC's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $2.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $189.7 million, earnings will come to $22.6 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $3.31, the bearish analyst price target of $2.5 is 32.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.