Digital Brands Group, Inc. ($DBGI) has another bull in its corner. Goldman Small Cap Research analyst Rob Goldman initiated coverage for Digital Brands, modeling for its share price to reach $7 in the next 12-months. He notes, though, that even his expected 269% spike in price over that period could prove to be conservative, and going by the numbers, he may be right. That’s the excellent thing about analyst coverage; they forecast using models that provide objective comparisons to sector peers. In $DBGI’s case, results indicate shares may be grossly undervalued.
Goldman likely knows what he’s talking about. He founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. In addition to his work leading GSCR, Rob serves as the Director of Research for Marble Arch Research, Inc. During his tenure as a sell-side analyst, Rob was a senior member of Piper Jaffray’s Technology and Communications teams. Before joining Piper, Rob led Josephthal & Co.’s Washington-based Emerging Growth Research Group. In addition to his sell-side experience, Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
Supporting A Higher Multiple
So, with that pedigree, Goldman’s research is likely on the conservative side? Moreover, it’s good to know that valuation models support his bullish conclusions. Furthermore, he’s not the only one recognizing the bullish proposition. For months, L3T coverage has argued that $DBGI stock is considerably undervalued, noting a ramp in sales at Bailey 44, DSTLD, Harper & Jones, Stateside, and, soon, Sundry.
Moreover, the DBGI story is about more than just revenues; it’s about how potent they can be. In that respect, income is expected to fall faster to its bottom line from $DBGI’s digitally native-first business model. In other words, because DBGI controls its own distribution, sourcing products directly from third-party manufacturers and selling directly to the end consumer, it cut out at least two layers of middlemen. Thus, its guidance to generate between $37.5 – $42.5 million in revenues is more than just impressive; those revenues can be powerful enough to generate EBITDA positive results faster than many expect. That’s a big deal, and it also justifies a share price rise.
So, how does DBGI get to $7, or better yet, reclaim its $8.80 52-week high? By keeping on, keeping on. In fact, doing just that positions its shares to accrue value as its brands continue to penetrate markets and send revenues higher. That’s happening now.
Sales Are Surging
Sales rose by 44% from 2020 to 2021, and a generous tailwind came with it. Sales this year are expected to be exponentially higher, jumping from $$7.6 million to upwards of $45 million. Goldman indicates that sales could reach as high as $52 million after its Sundry acquisition closes. And when using peer valuation price/sales ratios, Goldman’s case is made.
Sideline investors should consider this. DBGI shares trade at $1.90 because it’s getting a paltry 0.5X multiple on projected FY22 sales. What do peer companies earn right now? Roughly 2.7X sales. Why the disconnect? Great question, but believing that guidance is accurate, the answer isn’t that important. Instead, focus more on the opportunity rather than trying to solve market riddles. Current prices, especially considering a massive increase in revenues, make this one too big to ignore.
Moreover, being a vertically-integrated company, DBGI may squeeze revenues tighter than its peers, suggesting that even a premium multiple is deserved. Yes, investors want growth, and they’ll reward it. But, add high-margin sales into the mix, and the recipe gets much tastier from an investor’s perspective. That’s what Digital Brands is cooking up. Better still, combining its business model with its targeted M&A strategy, DBGI is better positioned than ever to justify a premium valuation, with its ability to cross-sell and take advantage of a model that allows fixed costs to decline as a percentage of revenue.
More Rev-Gen Firepower In 2023
By the way, the jump from $7.6M in 2021 to $52M in 2022 is just for starters. Forecasts into 2023, which account for full-year contributions from all its brand assets, call for revenues to surge to $87M, bringing EBITDA profit as early as 4Q22, with annual EBITDA profit in 2023. Thus while DBGI may be trading at a substantial disconnect between intrinsic value and price, that’s likely to change heading into the final quarters of 2022.
Remember, too, DBGI is still on an M&A mission, with guidance suggesting that more accretive, positive cash-flow acquisitions are in the crosshairs. So, while Goldman’s PT is $7, don’t count out a quick return to its $8.80 level, especially with the company far better positioned today than at that time.
Here’s the bottom line- DBGI is firing on all cylinders, and undervalued prices backed by strengthening fundamentals tend to correct quickly. For smaller companies like DBGI, it may take more time to get out from under the radar, which is now happening. Still, the trend for the stock has been decidedly bullish in March, and while its shares are already worthy of a much higher price, taking advantage of the current opportunity is what’s in play.
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