Taking the mid-range of Vita Coco’s targeted share prices, the company’s valuation comes out to roughly $1.1 billion. Public companies that are good comparisons for Vita Coco include Coca-Cola, PepsiCo, and Monster Energy. Although none of these companies produce drinks that are directly comparable to coconut water, they all have a diverse portfolio of beverages similar to Vita Coco. In order to determine if the company is pricing itself fairly in its initial public offering (IPO), it is useful to look at the company’s enterprise value (EV), revenue, and earnings before interest, tax, debt, and amortization (EBITDA), and their respective multiples.

All data from most recent fiscal year. Source: DiscoverCI

On an EV-to-Sales (EV/Sales) basis, Vita Coco is actually undervalued compared to Coca-Cola and Monster and fairly priced compared to PepsiCo. Strictly looking at EV/Sales, Vita Coco is fairly priced. Vita Coco’s EV/EBITDA multiple is also reasonable compared to its larger competitors. Comparing the company’s multiple to only “non-alcoholic beverages,” then this source indicates most of the companies on the table above are trading higher than the sector average of 17.2x (data up to the first quarter of 2021). The same source indicates the “better-for-you” beverage subsector median EV/EBITDA is 19.9x, which Vita Coco is in line with.

Taken all together, Vita Coco is going public at a reasonable price. One can even say that Vita Coco is slightly undervalued given the company’s dominant market position. When considering previous initial public offerings (IPOs) in 2021, Vita Coco is reasonably priced amidst a sea of generally overvalued IPOs.

Vita Coco was founded in 2004 and was one of three early coconut water brands — Zico was founded in 2004 and ONE was founded in 2005 but is now discontinued. The trio were among the earliest brands popularizing coconut water nearly two decades ago. Of the three, Vita Coco has emerged as the most popular and enduring brand as evidenced by its 46% market share. Additional sources pegged Vita Coco’s market share just shy of 39% in 2017. Given Zico declined in popularity after Coca-Cola’s acquisition, it’s reasonable to assume the 46% market share number is accurate enough.  

The global coconut water market was estimated at $1.77 billion in 2020 with an annual growth rate of 5.8%. Another source has the U.S. coconut water market at $1.2 billion. Unfortunately, the plant-based water market’s popularity fluctuates often. Vita Coco, however, has started to diversify its portfolio of non-alcoholic beverages with products like Runa, PWR LIFT, and more. The non-alcoholic beverages market is massive at more than $1.1 trillion and is expected to grow at more than 8.9% for the next few years. So long as the company continues to diversify outside of plant-based waters — and specifically out of coconut water — Vita Coco may hit on another non-alcoholic beverage that will propel the company’s growth.

Last, overall market trends continue to work in Vita Coco’s favor. Consumers increasingly prefer healthier beverages as the pandemic and growing health awareness has put personal health into the spotlight. Vita Coco plays right into this trend with its namesake coconut water, natural energy drinks, and more. All in all, market trends, market dominance, and growth opportunities are bright spots for the company.

The genesis of Vita Coco started in a New York City bar. Co-founders and best friends Ira Liran and Michael Kirban met a pair of Brazilian women. The women stated that the thing they missed most about their home was coconut water. Liran wound up falling in love with one of the women and moved to Brazil where Kirban visited him soon after. In Brazil, the pair noticed how popular coconut water was in Brazil and capitalized on the opportunity. Despite the two having no experience building a consumer goods brand, the duo have excelled.  

The most significant change to Vita Coco’s team was in 2019 when the company brought on Martin Roper as President. Roper previously served as the CEO of The Boston Beer Company for more than 15 years where he oversaw Boston Beer’s significant revenue growth and product expansion. In January 2021, Roper was elevated to a co-CEO position alongside Kirban. Kirban will focus more on innovation and long-term initiatives while Roper works on operations. This arrangement is likely to be beneficial to Vita Coco since Roper has had significant experience growing multiple brands for a public company. 

Vita Coco’s board of directors contains a group of independent advisors as well as previous investors. Vita Coco has nine board members including co-founders Ira Liran and Michael Kirban with Kirban also serving as Chairman of the Board. Other board members include Martin Roper, John Leahy, Axelle Henry, Eric Melloul, Jane Morreau, Kenneth Sadowsky, and John Zupo. 

Liran and Kirban have assembled a strong team for Vita Coco. The two, especially Kirban, had the self-awareness to bring on an experienced operator with a track record of success in Roper. Kirban and Roper are strong leaders with the vision and operational experience to continue innovating and growing new brands under the Vita Coco umbrella.

In the 80s and 90s, unhealthy beverages like sugary sodas were the most popular. Today, water is the most popular beverage, and many other “better-for-you” beverages are increasing in popularity. Vita Coco’s early move into coconut water has allowed it to secure more than 40% of the market. That success has allowed it to diversify into the broader non-alcoholic beverage category. The company now has several brands: Runa (energy drinks brewed from guayusa), PWR LIFT (flavored protein-infused water), Ever & Ever (sustainably packaged water), and Choc-o-Lot (vegan and dairy-free chocolate drinks). It can be reasonably expected for the company to continue to diversifying in the non-alcoholic beverage space.

Unfortunately for Vita Coco, each of its brands compete in intensely competitive markets. Runa competes against several plant-based and non-plant-based drinks like Guayaki, Red Bull, and Monster Energy. PWR LIFT competes against Protein2o and the broader protein drinks category. Each of the company’s brands isn’t highly differentiated from its competitors either, making it even more difficult for its brands to stand out. 

Overall, Vita Coco is operating in very competitive markets. Fortunately for the company, it has built a very strong hold on its core market which will provide time for the company to grow beyond its namesake brand.

Vita Coco’s revenue and margins grew from 2019 to 2020. While revenue grew less than 10% and gross margins grew only 3%, both operating margins and net margins increased by more than 200%. Additionally, the company has become more efficient in acquiring customers. This improvement can be seen in its SG&A decrease alongside increasing revenue year-over-year (YoY). 

Despite the company’s growth in revenue and margins, Vita Coco’s gross, operating, and net margins are lower than the industry averages. Perhaps as the company continues to scale across different sub s

ectors of the broader non-alcoholic beverages sector it will be able to overcome this weakness.

Vita Coco has built strong distribution channels and branding. Keurig Dr Pepper and Costco are Vita Coco’s biggest distributor customers, accounting for approximately 19% and 35% of Vita Coco’s net sales. The company also has strong branding. It has had major celebrities like Rihanna, several pro athletes, and more endorse its products. The company has done a good job in building the necessary relationships and capabilities that has gotten it to where it is today.

Vita Coco has increased revenue, gross, operating, and net margins, and has built a strong distribution network. Unfortunately, the company has more to improve especially as it goes public. Public market scrutiny is notoriously critical. Vita Coco needs to be able to reach industry level standards in order to rise above its intense competitor pool.

An investment in Vita Coco has many risks associated with it. Although Vita Coco has done a great job building distribution customers in Keurig Dr Pepper and Costco, those two customers account for a majority of its sales. A decision by either company to move away from coconut water because of waning demand or a new partnership would be detrimental to Vita Coco. The company’s revenues are also heavily concentrated in coconut water itself. Coconut water comprises 85% and 84% of revenues in 2019 and 2020, respectively. While Vita Coco has made coconut water its bread and butter, successfully diversifying revenue streams with new products is key if the company wants to grow. So far, however, it seems Vita Coco hasn’t cracked that shell. 

On a related note, coconut water demand and interest has fluctuated over the years. While hard to truly pin down the size of the market, Coca-Cola’s choice to divest itself of its acquisition of Zico could signal weakening popularity. Additional sources say coconut water officially peaked in 2016 and has since waned in popularity. If that’s the case, there’s immense risk in continuing to have its revenues so heavily concentrated in coconut water. Less market demand undoubtedly hurts Vita Coco most. 

Overall, it’s vital that Vita Coco develops another product category in order to move away from the associated risks with coconut water. Diversifying the company’s product portfolio moves the company away from systemic risks and allows it to be a more enduring brand. 

There are quite a few bearish cases for Vita Coco. If the company can’t move away from coconut water, then it won’t be able to grow substantially. In particular, it seems that Vita Coco will struggle to improve its margins if it remains strongly in coconut water. The company needs to increase efficiency by nearly 50% to meet industry averages. Vita Coco is already one of the most popular coconut water brands on the market. If it hasn’t met industry standards by this point, it’s not clear that it will be able to do so in the future. 

Additionally, the company’s initial public offering (IPO) is offering 11.5 million shares, 9 million of which is being offered by previous shareholders. None of the proceeds from previous shareholders will go to the company — instead, it will reward early investors looking to cash out. While it’s fairly normal for previous investors to want to cash out as soon as possible, it’s still a possible bearish signal that most of the IPO isn’t helping Vita Coco. 

Lastly, while the company holds a massive amount of market share in the coconut water category, it could very easily lose it. Zico, the company’s primary competitor in the past, is now back in the fold after being acquired by its original founder. Harmless Harvest, Nirvana, and many others compete with Vita Coco and can take advantage of the company’s shifting focus from coconut water to eat away at its hold on the market. Overall, Vita Coco faces steep competition and has not achieved industry-average efficiency. If the company is not able to diversify its product offerings while improving its operations, it may not be able to grow beyond its current, limited success.

Vita Coco has the potential to be an enduring non-alcoholic beverage brand. Consumer trends towards healthier beverages and sustainable packaging play right into the company’s strategy. Vita Coco’s Ever & Ever is a sustainably packaged bottled water (with bottled water being the most popular beverage domestically). Its Choc-o-Lot brand is a vegan-friendly beverage, and the company’s other brands are moving on that consumer trend. There’s massive growth potential if the company hits on any one of the growing beverage subcategories. 

While Vita Coco holds more than 40% market share in its specific category, the company believes that there’s greater opportunities to penetrate U.S. households and international markets. Assuming market demand for coconut water doesn’t waver, then the company could potentially even grow the current market. 

Vita Coco has potential to be a good growth opportunity as it diversifies its products and further penetrates the coconut water market. If the company can grow the two successfully, then it could become a dominant player in the non-alcoholic beverage market at large.

Vita Coco is the definitive coconut water brand founded by Ira Liran and Michael Kirban in 2004. The company is the most popular brand within its niche in the U.S., the U.K., and other countries. While known for its coconut water, Vita Coco is now trying to enter other markets within the non-alcoholic beverage category with Runa, Ever & Ever, and other brands. The company is going public after a successful year growing its revenues, profits, and margins. 

Vita Coco has a number of bright spots: a fairly priced offering, a strong team and co-CEO with experience growing multiple brands, and favorable market trends. However, there are also notable red flags: a potentially shrinking market, no success (yet) of diversifying out of its initial niche, and intense competition. While Vita Coco has seen massive success within the coconut water niche, it must crack open the coconut shell and grow outside its niche in order to grow substantially. For these reasons, Vita Coco is a Neutral Deal.

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written by Francis Vu, October 21, 2021.