Last week certainly was an incredible one for shareholders of Bubs Australia Ltd (ASX: BUB). The newly listed goats milk infant formula manufacturer saw its share price climb as much as 350% in just four days before ultimately running out of steam.
Whilst Bubs gave back a lot of its gains on Friday, it still ended the week 210% higher than its 10 cents listing price.
Unfortunately though it hasn't been able to carry the momentum over from last week and as we approach lunch it is almost 10% lower at 28 cents. Are there more declines to come?
After such a strong rally it seems inevitable that profit taking will happen. In fact, it seems to have been happening since shares peaked at 45 cents on Friday.
It's no surprise either unfortunately. Although I think the company has a strong product, an influential board, and several notable backers, I find it hard to justify the current market cap.
In FY 2016 the company made a $1.3 million loss on sales of $4.3 million, yet today has a market cap of approximately $68 million.
This means its shares are changing hands at just under 16x sales, compared to a2 Milk Company Ltd (Australia) (ASX: A2M) which trades at a reasonably expensive 4x sales.
Whilst Bubs might well produce the growth that ends up justifying this premium, I would suggest investors hold off buying its shares until there is evidence that Chinese consumers want the product.
I'm optimistic that the company has a bright future, but not enough to risk any hard earned money in its shares right now.
