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:
#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.
