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The Fever-Tree Drinks share price is down 10% today. Here’s what I’d do now

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Shelves holding drinks bottles
Image source: Getty Images.

The AIM stock Fever-Tree Drinks (LSE: FEVR) is one of the worst performers today. The Fever-Tree Drinks share price has fallen 10% as I write, after it released its full-year 2020 results earlier today. Its revenues are down 3%. The mixer drinks manufacturer’s earning per share is down a whole 29% too. 

Yet, I think the Fever-Tree share price dip is an opportunity to buy the share. Here are two reasons why:

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#1. Future looks better for Fever-Tree Drinks

The foreseeable future looks much better for the company. First, the UK is coming out of lockdown. The UK is Fever-Tree Drinks’ biggest market, accounting for around half its total revenues. It saw a 22% fall in revenues in 2020, which can hopefully be turned around now. 

As the economy gets back on track, I think it is reasonable to assume an increase in demand for products like alcohol and mixers. They will definitely get a fillip from the reopening of bars and restaurants, which are also a significant source of revenue for the company.

In line with this, it expects 12%–16% revenue growth in 2021, which is strong considering that in 2019, the last pre-Covid-19 year, revenue grew by a smaller 10%. 

#2. Expanding into new markets

While this growth can indeed be boosted from the UK’s re-opening, I also like Fever-Tree Drinks’ expansion into new markets. Specifically, the 23% growth in US markets is notable. 

The US accounts for more than 20% of its revenues already. With the US economy having made a smart comeback now, I reckon this market will continue to show strong growth. 

Further, 58% growth in the ‘rest of the world’, which means markets other than the UK, US, and Europe, reflects huge potential too. So far, the segment accounts for 10% of revenues but if it continues to expand at this rate, I think we can expect it to become more important in the years to come for the company. 

What can go wrong for the Fever-Tree Drinks share price

While all this bodes well for the Fever-Tree Drinks share price, I think it is important to look at the potential downside to the stock too. 

First, consider its price-to-earnings (P/E) ratio of 55 times. Despite its strong prospects, I think the ratio is a bit high. Stocks with strong performance in 2020 and continued prospects in 2021, like FTSE 100 miners for instance, are available at lower valuations. 

Two, the Fever-Tree Drinks share price is prone to volatility. The latest dip is one example, I have written about other instances in the past. Such fluctuations may not be every investor’s cup of tea (or cocktail, in this case). 

Conclusion

The Fever-Tree Drinks share price has a way of bouncing back. Since the lows of last March, it is up 2.5 times.

While there is still much debate about whether we are heading for a slowdown or a boom, there is likely to be undeniable pent-up demand for outside entertainment, with drinks in the mix. I would still buy the stock.

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In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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