Krispy Kreme’s shares are once more sending investors on a rollercoaster ride – this time fueled by the mania of meme stocks.
The shares of the doughnut chain have surged over 50% since Monday, even as the company struggled through one of its most challenging years ever.
After months of falling revenue and a failed partnership with McDonald’s, the Charlotte firm appeared to be losing its luster. But in three days, stocks surged to $4.86 – their strongest run since 2021. The surge created a buzz on social media, with Reddit investors comparing the firm to Beyond Meat, another meme stock that recently doubled.
But the financial pros caution Krispy Kreme’s current run appears to be a sugar high – thrilling but ephemeral.
Krispy Kreme’s difficulties started earlier this year when a much-heralded McDonald’s franchise deal fell through, prompting Krispy Kreme to pull its full-year guidance. Since then, its shares have plummeted more than 51%, and analysts forecast sales to decline by around 8% this year, FactSet reports.
So what’s the explanation behind this sudden rush of investors? Some internet forum postings attribute the buying spree to a positive Morgan Stanley report. But that seems to be a misinterpretation.
Morgan Stanley’s latest food report did note that Krispy Kreme performed better in the third quarter – but only as a matter of fact, not of recommendation. Indeed, the same report gives the stock a “underweight” rating and has a target price of $2.50 per share, which is a long way from its present trading level.
The report then characterized Krispy Kreme as “an iconic company with less brand risk but without the history of operational performance and execution of strategy.” That doesn’t sound exactly like a rosy recommendation.
Adding to the uncertainty, Krispy Kreme did not respond to requests for comment right away. But analysts and longer-term investors are still cynical that this rally is anything other than a fluke.
One possible driver of optimism might be the company’s international expansion. Krispy Kreme just announced a new store opening in Madrid and plans more openings in Brazil and Uzbekistan by the end of the year. But the news was released on Oct. 15 – a few days before the rally fueled by the meme started – indicating the surge is not necessarily connected with company news.
Despite these global goals, most Wall Street analysts are disappointed. Seven out of eight analysts following Krispy Kreme give it only a “Buy” rating from one analyst. The average price target is $3.84 per share, still below its current market value.
Ultimately, though Krispy Kreme might be the flavor of the moment with retail traders, most money men regard the rally as just another brief meme stock phase. The thrill may provide short-term entertainment for gamblers, but without more solid financial underpinnings, it won’t endure.
As enticing as the doughnut company’s ascent may appear, investors would do well to recall – not every tale of sweetness has a tale ending in a happy chomp.
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