SOWG - Sow Good Inc.
Waterless candy
Purpose
We will look at the freeze dried candy business. Then talk about Sow Good and its position within the market today. Think about the future of the company and the business as whole. Outline possible risks. Talk about valuation, placing special emphasis on the downside.
What they do
They make freeze dried candy. They take other people’s products (skittles, ice cream sandwiches and what not) and dump them in their machine which gives out the same thing but with 99% of its moisture removed. This process increases the shelf life by years. Increasing it to 25 years. Compared to regular candy which ranges from a few months to an year. This is how it looks:
How do they do it
They have 5 freeze driers in Irving, Texas. One more is being installed. And 5 more are ordered which should be ready by Q1 2025. Revenue estimate of up to 10M per year per freeze drier depending on product mix. They work 24 x 7. While these driers are custom built, I see no moat here. Anyone can order these and start making it but Sow Good definitely have the early mover advantage here.
To expand margin and make production cheaper, they have partners and co-manufacturing facilities in Colombia and China.
Trends
The global candy market is projected to grow significantly, with estimates indicating a rise to approximately $113.67 billion by 2030, achieving a compound annual growth rate (CAGR) of 4.5% from 2023 to 20301
In the U.S., the candy market is expected to reach $22.9 billion by 2030, growing at a CAGR of 4.9% during the same period2
According to the National Confectioners Association ("NCA”), the non-chocolate confectionery market grew 13.8% in sales in 2022, exceeding $10 billion,and according to Grand View Research is forecasted to grow at a compounded annual growth rate of 5.8% from 2023 to 2030.
The global freeze-dried candy market is experiencing significant growth, with an estimated market size of $1.36 billion in 2023 and a projected CAGR of 8.5% from 2024 to 2030. This growth reflects evolving consumer preferences, advancements in food technology, and increased product innovation. By 2030, the market is expected to reach approximately $2.38 billion3
Freeze-dried candies have gained traction primarily due to their visual appeal on social media. As of August 2024, there were over 122 million TikTok posts related to freeze-dried sweets, showcasing various brands and homemade experiments
Sales
These trends can be seen in action in the revenue of Sow Good Inc. In 2021, their sales were 88,000$. Now they are at 16 million $ in just two years. As of 2024, the company employs approximately 225-226 people so they are sufficiently lean as well. They currently sell here:
Slowly and gradually, they are increasing the number of stores where their candy is sold. They are currently only in 300 targets but should expand to more than 2000 by the end of the year. They also added distribution in more than 30,000 natural food stores and independent grocery stores through KeHE Distributors. In terms of online presence, they are now being sold on target.com & walmart.com.
International venture: they are now in Israel as well. I couldn’t find details on how people like the product there but this is a good sign because Sow Good is moving fast without compromising on profitability.
Management
The most important thing to know here is that the management has experience in freeze dried products for over a decade. They had a freeze dried pet food company which they sold in 2020 and moved to the candy business. A whopping 62% of the shares are owned by insiders. And they are buying more:
All positive signs. One negative is the executive compensation which is a lot. They should be less greedy but what can we say, they are all like this. They need their 7 million $ yachts.
Going through glassdoor reviews, people are quite unhappy that the family has so much power. “Low pay, promised raises and bonuses never paid, HR run by family and never does anything, treats all non family horribly,” one reviewer said. Make of this what you will.
Competition Analysis
So far there is no real competition that is publicly traded or can match the distribution power and resources that Sow Good has right now. People are making DIY freeze dried candy but that doesn’t seem like a big deal since it requires work and equipment. Makes for nice TikTok videos but I can’t see people doing the whole thing on their own.
There is no moat since the trend is still new, but what is good is that major players and getting in. Skittles is planning to launch its own freeze dried product which is currently only on sale through TikTok. Mars is entering this space too. Any advertising they do is just reinforcing the trend and since Sow Good is the biggest player here they will for sure benefit.
They are also a prime candidate for being bought out since the market cap is quite low around 100 million. They are moving away from freeze drying other people’s products and sourcing their candy from elsewhere. I see reddit reviews saying its not as good anymore now that they are using their own candy, but I have faith that the company is not run by idiots and they can do taste tests and find some new interesting flavors. They currently sell 18 different types and are adding to it constantly. So they are still the biggest player with the most flavors.
I just see good here. The downside is that soon the pricing wars may begin and they will all try and undercut each other as more players get in this space. Competition is never good for business but margins are hopefully maintained because they can do the whole thing with just 220 people and they are entering the international market. Plus manufacturing partnerships outside of Texas should help in reduction of overall costs.
Future Prospects
The Halloween season, the Christmas season, and Thanksgiving all would contribute to the top line revenue. I see good things happening for Sow Good in Q4 of 2024. And even if this is a fad, I feel like the fad has not maxed out yet. No one I know has ever tasted or knows about freeze dried candy. Their online sales contributed to just 2% of the revenue, but now they are also selling on Amazon. The reviews of which mention that they would buy more and that these candies are “addictive.”
They are currently doing a strategic review and pushing to increase their online sales. I see more and more videos and shorts focusing on freeze dried candy, slowly and steadily this should catch up.
Valuation
Let’s look at the downside risk, say this is a fad and now revenue growth will be quite less in the future. Say there is only a 10 to 20% YoY growth of the top line. Say the overall market sentiment is negative and the PE ranges from 10 to 20. Say the management are actually idiots and the profit margins are now 10 to 15% instead of the 21% reported in Q2 2024. Even then we get a 50% increase compared to the value today.
And the company has practically no debt. I see a wonderful asymmetric opportunity here. I’m not going to focus on the positive case since the best case scenario is that this becomes a product everyone likes and YoY growth could be a lot lot. Those would be insane numbers so I’d rather not think about them now.
Let’s talk about declining sales, what happens if the sales start declining? I’m not sure but since the shelf life is 25 years I’m assuming they could just start producing less and sell their existing driers.
Why did the stock drop
They mentioned that Q3 2024 would be worse than Q2. The reasons mentioned were melting of candies due to the heat and distributors not getting the product on time, overall candy sales reducing, and that people eat less candy in the summer months. I’m not entirely convinced by any of these reasons. This might signal a dying trend but I still see this picking up for Q4 because of the reasons highlighted earlier.
Risks
No long-term moat. I don’t think anyone is loyal to their brands or anything right now. If anything, others could undercut them on price and they would have to match the giants.
Maybe this is just a fad and sales don’t increase in the future at all. Something like Beyond Meat where sales seem to be declining. This might be true but I just don’t think that Sow Good has reached its peak yet so we should be good here.
Other trends of the past are froyo shops, raindrop cakes, sushi burritos, etc. so maybe this is just one of them and not a very long term investment. Use your own judgement.
https://www.coherentmarketinsights.com/market-insight/candy-market-4499
https://www.globenewswire.com/news-release/2024/09/20/2949525/0/en/U-S-Candy-Market-Size-Share-Trends-Analysis-Report-2024-Chocolate-Candies-Dominated-with-54-7-Revenue-Share-in-2023-Innovation-in-Sugar-Free-and-New-Candy-Boosts-Demand-Forecast-to.html
https://www.grandviewresearch.com/press-release/global-freeze-dried-candy-market