Bergio International (OTCMKTS: BRGO) is a long-standing jewelry designer and manufacturer with an established 25 year operating history. The CEO known as “Berge” can trace his roots back to the early days of Neiman Marcus where he continues to work as a designer. The move to acquire a controlling interest in Aphrodites.com is an evolutionary step for it into e-commerce.
Investors have seen favorable signs in the capital structure of Bergio International which recently cleaned up its balance sheet and appears to have no more debt on its books. This is a trait that long-term investors tend to embrace, but all investors love revenue and especially exponential revenue growth.
With a 16.5X increase in revenue, what is there not to like in this story? The acquisition brings with it significant revenues over $10 million, but more importantly an online distribution juggernaut with a 4-year track record of success that has done over $31 million in sales since inception. The deal itself has many nuances we will expand on later, but suffice to say, it’s ultimately a non-dilutive stock deal once you dig into the fine print.
Bergio’s Achilles Heel Gets Aphrodite Plating
The missing ingredient in Bergio’s arsenal has always been a strong online presence. The Amazon store was good, but they needed more. The acquisition announced today with Aphrodites.com is a complete game-changer for the company and puts them on par with another specialty jewelry designer Charles & Colvard (NASDAQ: CTHR). In fact, Aphrodite’s revenue targets for 2021 is $32.4 million which is on par with CTHR’s current online revenue run rate of $30.3 million.
Charles and Colvard – Comparable Valuation
Valuation needs to play catch up. CTHR’s current market cap is $69 million versus BRGO’s market cap of $3.1 million. BRGO’s plan is to get to the size of CTHR in 2 years assuming no growth in the BRGO line. This means fair value for BRGO on a comparable basis is half the market cap of CTHR or $35 million. This translates into a stock price of $.29/share for BRGO shareholders. BRGO is currently trading at an 87% discount to its closest comparable company, CTHR, and should correct the valuation gap as investors wake up and smell the coffee because they were asleep at the switch yesterday after the news broke. This valuation gap simply cannot stand for CTHR or one of the largest rollup plays in luxury goods, Signet Jewelers (NYSE: SIG) will be forced to buy them.
Transition from Brick and Mortar to e-Commerce
Designing is Bergio’s core competency, and the pandemic all but destroyed their foot traffic. The good news is that they were already in the process of transitioning to online sales. They were very fortunate and got their foot in the door with Amazon and started to see significant traction right away. Until this past year, the company’s online presence was gestational at best. Strong sales and a commitment to extinguish the convertible debt transformed Bergio last year and left them with a strong foundation on which to grow their online sales.
Cross-Selling Opportunities – Huge Upside
The Bergio name is known for quality but also uniqueness with its roots in high fashion. Most if not all of the smaller online brands, buy their wares from the same trade shows that everyone else goes to. It’s hard to stand out in the online jewelry business unless you have your own style. Bergio clearly has a unique and time-tested style that people have come to love and embrace. But it doesn’t stop at jewelry because Bergio’s also has handbags, wallets, belts, and watches. The issue at Bergio’s has always been distribution and Aphrodites.com and Amazon.com might finally be able to clear the air so that Bergio’s can spread its wings.
Luxury Goods Market Rebounding
Despite the pandemic, the luxury goods market has been on a tear. For the most part, this statement doesn’t make any sense because everyone is struggling and coping just to stay afloat. People haven’t forgotten about the financial crisis or the unemployment rate, but they have changed their behaviors. Luxury goods are the first things people cut out but there comes a point in time where people just need a break and that is when the rebound happens. This is not a new phenomenon. The financial crisis of 2008 saw the same sort of rebound even with the economy in the tank.
The old saying is that history repeat itself and this chart of the current S&P500 versus a luxury goods index shows a steep sell-off and then a massive rebound. The thing to watch is that luxury goods have a tendency to outperform the market over time, so it’s actually a safer play than the market itself at this juncture because it should continue to rise despite the economic woes. It’s almost become a leading indicator. The catalyst for luxury goods is a return to normalcy sometime in the future, and that is possible right now.
Importance of Social Networks
Social media is playing an ever-increasing role in almost everything we do and now there is pretty clear evidence that the success of the jewelry lines is tied to the size and growth of the social network. The largest online jeweler is Etsy (NYSE: ETSY) and the market caps of these companies are in direct portion to their overall ranking on the web and social media represents a huge part of the algorithm.
Analysis of the size of the social networks and the different platforms that they are on revealed some interesting observations. Urban Outfitters (NASDAQ: URBN) which owns Anthropologie had the biggest social network, but that didn’t translate into market capitalization gains. The top platform determining social media relevance was Facebook, but the younger millennials seem to be gravitating toward Instagram. There is one anomaly in the chart, and that is Signet Jewelers. They own a lot of brands like Kay Jewelers, Zales, Jared, H. Samuel, Ernest Jones, Peoples, Piercing Pagoda, and James Allen. If combined under one name they would boost up their composite social media score. In the chart, only Zales, the most prominent one was used. Because they own a lot of brands they are a serial acquirer and if BRGO is able to ramp the business it’s possible they will catch Signet’s eye. The biggest surprise is that BRGO’s Aphrodites is actually 4X larger than its competitor CTHR on a composite score. The composite score used Norstrom’s as its baseline because it had the most even distribution amongst the social media platforms.
The price to sales multiple is the simplest way to value most online jewelers. The highest in the industry is ETSY with a 21.4 and it deserves this valuation because of its meteoric revenue growth. Last year this multibillion-dollar company had a 146% sales spike in one quarter in the marketplace category. They are doing something right, and they have the highest-ranked website in the sector. Etsy is also a leader when it comes to profitability. Increasing revenues fall quickly to the bottom line. Nordstrom (NYSE: JWN) recorded the best revenues by a very wide margin, but that didn’t translate into market cap gains because the brick and mortar infrastructure is weighing them down during the pandemic.
The average industry multiple for this group is 4.5. The most undervalued stock on a price to sales is BRGO. If BRGO’s multiple expands to only 2.5 so it’s on par with CTHR then that represents a $45.0 million valuation which translates into $.38/share. There is reason to believe that the 80% margins will be sustainable because they are going to have exclusive inventory from Bergio and will not face any price competition on his original pieces.
The 8-K was a lengthy document (over 55 pages) and based on some of the message board chatter and the paltry stock price reaction after the news it’s very clear that investors didn’t fully digest the news. This was a preferred stock deal and preferred stock by its nature is designed to be anti-dilutive. BRGO is getting 51% of the company and has the first right of refusal to buy them out according to a formula. The formula is basically the proforma projection for 2021 and 2022.
If investors ran the numbers on the 2021 projection they would get earning of $.107 per share in 2021 and $.196 in 2022. This means the stock is currently only worth 20% of 2022 earnings. This valuation doesn’t include any enterprise value. Investors need to ask themselves if they are willing to pay $.20 cents on the dollar for cash that matures in 2 years. That’s another way of looking at the stock.
Some of the main conditions of the deal are an employment agreement with the CEO Jonathan Foltz and other key employees. They have a section of the agreement that sets the conditions on when their shares vest (2 years) and the potential bonus shares for exceeding their targets. As it stands now they get 49,000 shares and a bonus of 19,000. It is also an asset deal with debt. BRGO is also getting a whole host of website brands as part of the acquisition. BRGO is assuming some of the debt of the company.
BRGO is funding the company in stages through a convertible promissory note structure. This means that if for some reason things don’t work out then BRGO will not lose its investment in Aphrodite. The initial tranche of funds are going toward debt extinguishment and audit expenses. The second tranche is via an S-1 for only $750,000. The final stage is $3.5 million whereby the funds go to the selling shareholders to pay for the acquisition. Any money raised by BRGO over $5.0 million adds to their revenue targets.
The leader of Aphrodites is CEO Jonathan Foltz. He has a track record of success and could be considered a serial entrepreneur. The fact that he took stock in the company speaks volumes about his commitment level to the project. He is also the founder of Digital Age Business. His agency is a major player in the media space. He works with some of the most prestigious brands like Audi, Cisco, CocaCola, and Maserati. His vision seems focused on driving news sales and maximizing the synergies between Bergio and Aphrodites.
BRGO is on a new trajectory with this acquisition. There are clearly unbelievable synergies with the Aphrodites.com brand. The cross-selling opportunities are endless as it opens up a whole new audience. The Aphrodite team is comprised of millennials who have a real sense of the online world of e-commerce and know digital branding and how to market. The earnings stream pretty much pays for the deal itself. There is no shareholder dilution now or later because if everything works according to plan, the robust earnings generated from the business will pay the owners back out of their own cash flow. The whole luxury good sector has a tailwind behind them and it’s pushing all the names.
BRGO is extremely undervalued given this latest acquisition. The stock didn’t move up much because people rarely read the 8-K which is why it is summarized for investors here. Many probably missed the revenue projections and many probably didn’t understand they aren’t raising money at these levels they are raising money later.
The facts are simple, at these prices investors are essentially buying cash in the future at a discounted price. If this valuation gap persists for a prolonged period then BRGO becomes a likely takeover target. All the valuation metrics point to an extremely undervalued stock price whether its price to sales or earnings. Based on comparables the stock should be north of $.29 and based on a price to sales multiple the stock could trade as high as $.38 in the near term.
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.