Penny stock watch: Is it time to take a bit out of BARK, Inc.?

Key Points

• BARK, Inc. issued a guidance update with revenue and cash flow above target.
• The stock surged 20% and may continue higher, but how high is questionable. 
• The outlook is good but competition is fierce, and the short-sellers are in the mix. 

BARK, Inc. NYSE: BARK has been in the doghouse for years. The combination of overblown expectations and the SPAC implosion left little direction for the stock price but lower. Now, it’s down 95% from its lows but may be ready to come back fighting. The company leaned hard into efficient operations, reaching positive FCF and adjusted EBITDA this year. The latest news is that Q3 (calendar Q4) results are better than expected, and the stock is moving higher because of it. 

The move is significant for several reasons. The stock traded at its historic lows for over a month following a sharp downdraft and now shows a bottom. The bottom is compounded by indicators and volume that have the market on track to regain the $1.00 level soon. That’s excellent news for a company that recently received a non-compliance notice and could attract new money to the market.

Short interest plays a part in the stock movement, so there is a risk the move won’t last. The short interest isn’t astronomical but is running around 10%. That’s enough to get a short-covering rally into play, just enough to set up a bull trap because short-sellers have ample reason to sell the stock. They may reposition at a higher level; the market could become capped at $1.00 or near enough until more news emerges. 

BARK prereleases Q3 results 

BARK pre-released its Q3 results, and the news is all good. The company says revenue will run around $125 million or 200 basis points better than prior guidance. The take is also better than the Marketbeat.com consensus estimate driven by strength in the Bark Box and Super Chewer core products. Bark Box is the company’s flagship monthly dog toy subscription tailored to breed and need. The Super Chewer is an upgrade subscription for dogs that like to play rough. 

Among the highlights of the report is the customer count. Execs say new customer acquisition is the strongest in two years, leading them to increase ad spending. The new guidance includes a larger-than-expected loss because of it, but it can be ignored in favor of results. New customer acquisition costs are holding steady, allowing the business to build margins and drive free cash flow. 

Balance sheet solid, debt is coming down

One of the critical factors in this company’s story is the balance sheet. The company carries some debt, but leverage is low, the balance sheet is net cash, and positive free cash flow aids debt reduction. The company paid down $45 million in debt during FQ2, saving nearly $8 million in total costs. It may continue to reduce debt and free up additional cash flow as the year progresses. 

Marketbeat tracks four analysts with ratings on BARK. They are on board with the turnaround story. However, the Hold rating is down from last year’s Buy, signaling they’ve gone into wait-and-see mode. The 65% decline in the consensus price target may also weigh on the market, but the sell-off in 2023 overextended, and even now, with shares up 20%, it is well below the lowest target on record. 

The technical outlook: a reversal in play or barking up the wrong tree?

The price action in BARK is bullish and favors an increase in share prices. The caveat is that the market is still below critical resistance at the $1.00 to $1.09 level, where it may struggle to retain traction. This market could become range-bound in that event until more news is available. If not, and the market can move above $1.00, it could gain another 25% to 75% by mid-year as it moves up within its trading range. 

Among the risks for this company is competition. Chewy NYSE: CHWY is the leader in pet toys and already has an established business with ample exposure to auto-ship products and recurring revenue. It wouldn’t take much to dominate the monthly toy subscription industry.