Shares of Amplify Snack Brands (BETR, Financial) surprisingly popped 13% despite the company’s 10 million-share secondary offering which was priced at $11.25. Although Amplify wasn’t diluting its shares and all the shares belonged to the insiders, the pop in the stock is unjustified and makes it a compelling short.
None of the money generated from the company’s IPO went to the company, and the stock only went public to make the insiders and underwriters some money. The company did not benefit from the IPO and will likely not benefit from this secondary offering.
Lack of diversity
Amplify generates the majority of its revenue from one product — Skinny Pop. Skinny Pop is responsible for the lion’s share of the company’s revenue and overreliance on a single product can be damaging for any company.
Due to its dependence on Skinny Pop, Amplify is highly susceptible to increasing competition. In fact, the company reported a huge dip in its gross margins in the latest reported quarter, and investors can expect its margins to shrink in the coming days.
Despite the threat of competitors, shares of Amplify have been flat, albeit volatile, over the last few months. Investors have not priced in the concerns of the competition in the current share price, which makes the stock is a compelling short.
With increasing competition, Amply, which is trading at $13.5, should crash to around $9 in the next few quarters. Since the short interest in Amplify is not very high, investors can consider shorting the stock as the borrowing charges for it are not that high.
In addition, Amplify’s underwriters have a 30-day greenshoe option for up to an additional 1.5 million shares in the deal. The greenshoe option allows underwriters to sell investors more shares than originally planned by the issuer. Thus, today’s rally does not make any sense.
Conclusion
Amplify, despite all its concerns, is trading at a high valuation. The market has not priced in the competitive concerns, and the stock will likely fall to under $9 in the next few quarters. Thus, I think investors should capitalize on the recent rally to short the stock or at least buy some put options.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
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