Naked Brands Stock Price Fell 13% – Time to Buy NAKD Stock?

Naked Brands (NYSE: NAKD) stock fell 13.5% yesterday. While the stock is still up around 90% for the year, it is down 87% from its 52-week highs.

NAKD was among the popular meme stocks. This set of stocks rallied in the first half of the year as retail investors on Reddit group WallStreetBets went on a buying spree and triggered a short squeeze in several stocks. However, meme stocks traded on a weak note in the second half of the year and the sell-off only intensified over the last month amid the broader market volatility. The emergence of the omicron variant led to a sell-off in markets across the world and penny stocks were especially hit badly. Investors instead sought solace in financially strong mega-cap companies which can survive in tough times also.

Why did Naked Brands stock fell?

While the broader market sell-off has led to a crash in Naked Brands’ stock, the crash yesterday came at a time when the markets closed higher. The anomaly could be attributed to the reverse split in NAKD stock. The company has completed a one-for-15 stock split. Simply put, if you held 15 shares of Naked Brands stock before the reverse split, you would now hold only one. A reverse split is the opposite of a stock split where the company increased its outstanding share count.

Companies go for a stock split when their stock price rises steeply. For instance, Apple and Tesla split their stock in 2020 and more recently Nvidia has split its shares. The stock price invariably rises when the company splits its shares. The converse also holds true and stocks tend to fall on a reverse stock split.

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NAKD stock split

While companies split a stock voluntarily, the reverse stock split is usually for regulatory concerns. If the stock price of any company traders below $1 for long, it gets a warning from exchanges and risks delisting. As a result, companies reverse split their shares which inflates their stock prices, enabling them to meet the listing criterion.

Here it is worth noting that fundamentally a stock split does not change anything for a company as the rise or fall in stock price is accompanied by a commensurate increase or decrease respectively in outstanding share count.

Naked Brands transformation

Naked Brands has primarily been an intimate apparel seller. However, earlier in 2021, it exited the Bendon operations earlier this year to focus on the e-commerce operations and the Frederick’s of Hollywood brand. Markets have a thumbs up to the development as Bendon retail operations were perennially lossmaking and the pivot towards e-commerce was expected to lead to better margins for Naked Brands.

While NAKD was working to position itself as a pure-play e-commerce company, it faced challenges on several levels. Firstly, there are larger and diversified e-commerce players like Amazon which have a network effect and an impeccable ecosystem. Also, it would compete with brands like Victoria’s Secret.

Meanwhile, like fellow meme stocks, NAKD went on a stock selling spree to capitalize on the Reddit fuelled rally. It had over $270 million as cash on the balance sheet which it intended to use for acquisitions. The company did identify an acquisition target but it wasn’t in the same industry but a green energy play.

Naked Brands stock forecast

NAKD announced the acquisition of Cenntro Automotive Group which produces commercial electric vehicles. The deal was structured like a SPAC reverse merger and NAKD acquired a much bigger company.

“After assessing numerous companies with promising, innovative technologies, we believe Cenntro offers the most compelling opportunity, as it not only has unique commercial EV technology, but has proven that it has been able to manufacture and deliver growing numbers of commercial electric vehicles that are being used by many of the leading consumer companies,” said NAKD CEO Justin Davis-Rice.

NAKD stock long term forecast is now dependent on EVs

Naked Brands now has a market cap of $6 billion and most of the value comes from Cenntro. While the outlook for electric vehicles looks bullish, the merger between Naked Brands and Cenntro does not have any synergies. That said, NAKD stockholders voted in favor of the merger by a vast majority.

The long-term forecast for Naked Brands stock is now dependent on the success of Cenntro as it would also divest the Frederick’s of Hollywood business. Cenntro expects to post sales of $25.3 million in 2021 which it expects to rise to $506 million in 2022 and $2.1 billion in 2023. The combined company would have cash of $282 million which would help it invest in ramping up the capacity and meet the order backlog.

Incidentally, Cenntro was looking at an IPO to go public but opted for a merger with Naked Brands due to the ease of the transaction, which is also less time-consuming.

Should you buy NAKD stock

Based on the projected revenues, Cenntro trades at a 2023 price-to-sales of just below 3x. The multiples don’t look cheap even as the outlook for EV stocks looks positive. It might be prudent to wait on the sidelines for now before buying Naked Brands stock.

If you want exposure to an EV stock, Chinese EV company NIO looks like a good bet for 2022. It has underperformed its peers by a wide margin this year and looks set for a rebound in 2022. Most Wall Street analysts are also bullish on NIO stock and see it delivering strong gains in 2022.

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