UK Edition
Naked Wines is, in Questor’s view, a fascinating company – in its past, its present and its future. It has reinvented itself as few companies manage to and has built the foundations of a profitable online wine business. The problem is that, as a stock without obvious direct competitors and whose real profitability lies in the future, it’s not easy to value.
To recap its history briefly, it began life as Majestic, a chain of wine warehouses that operated a membership model based on purchases of at least one case. It then bought Naked Wines, an online operation, and in the end decided that was where the future lay and sold the bricks and mortar business to private equity investors.
The new online‑only business retains that membership model – customers pay a fixed amount every month, which they spend on the wines they want from a pool of more than 200 independent winemakers.
If all that change didn’t make discerning the company’s real financial potential hard enough, along came the pandemic.
Then there is the fact that the business is quoted on London’s Aim market but has set its sights on growing first and foremost in America, where an increasing proportion of its shareholders are based.
In view of all this we should not be too surprised about the stock’s volatility. We tipped it at 458p in June 2018 and before long the price had more than halved to bump along at about 200p for a while before a very strong rally as the pandemic began – and after the initial panic had died away – to peak at almost 900p in April last year.
Now the shares have fallen again to 602p. Interim results released in November prompted the most recent downward move in the share price. Sales growth collapsed from last year, although the initial pandemic boost was behind that. Shareholders were disappointed by the lower sales guidance for the 12 months to March this year and by a cut in the amount spent to attract new customers because the payback from such spending had fallen.
The company, like many others, also suffered from supply chain problems, which it said would push margins lower this year.
Thomas Moore of Abrdn, a long-term follower of the company, says: “Because of comparisons with last year’s trading, the market is getting very confused. And this is a company that could choose to become much more profitable at any time – it would just need to stop investing so much in growth.
“I can’t see any existential worries about Naked Wines. The question is, how patient are investors prepared to be? Naked will require more patience than most stocks and there will be more bumps in the road. It’s been quite a journey already and who knows where the company could get to in five years’ time, but you need to have the stomach for it. However, there are some long-term-looking investors on the share register.”
This should at least lessen volatility if fewer shareholders jump in and out of the stock in response to the usual fluctuations in trading.
We should point out that after holding Naked for many years, Moore has recently sold the last of his holding in his Aberdeen Standard UK Income Unconstrained Equity fund. However, this is because he invests for income and, while the old Naked Wines could pay a dividend while it included the Majestic chain of stores, the new online-only business does not pay one.
The requirements of our Inheritance Tax Portfolio are different – we look for long-term growth and qualification for the “business relief” tax break in our holdings. We must see Naked as one of the riskier – or at least more volatile – holdings in the portfolio but have faith in the company’s well defined and differentiated strategy.
We’ll hold.
Questor says: hold
Ticker: WINE
Share price at close: 602p
Update: Team17
The video games company, added to this portfolio in June 2019, said in a trading update yesterday that sales and profits, at least on the “adjusted Ebitda” measure, would be ahead of earlier expectations and better than in 2020 despite the virus-driven boom in that year.
The shares, as always when expectations are exceeded, reacted well and put on 3.9pc. Hold.
Questor says: hold
Ticker: TM17
Share price at close: 800p
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