On Thursday, Wag! Group Co. (NASDAQ: PET) experienced a downgrade in its stock rating from Buy to Hold by an analyst at Craig-Hallum, with a revised price target of $0.50. This decision was prompted by the company's disappointing third-quarter financial results, which fell short of expectations in terms of revenue and adjusted EBITDA.
The underperformance was attributed to inefficient marketing strategies, exacerbated by recent changes in Google (NASDAQ:GOOGL)'s algorithm. This particularly impacted the Wellness segment, which saw a 52% year-over-year decline.
The company's stock suffered as investors reacted to the poor quarterly performance, compounded by concerns over Wag!'s financial stability. With $19 million in debt against only $8 million in cash, and the debt maturing in August 2025, there is growing apprehension about the potential for bankruptcy. In response, Wag! is exploring strategic alternatives, including the possibility of selling strategic assets to reduce its debt burden.
The analyst noted that although there was a slight improvement in revenue in October and early November compared to the third quarter, these figures still did not reach the levels seen in the second quarter. The lack of clear visibility into the company's future and the reduced confidence in Wag!'s management team were cited as additional reasons for the downgrade.
The report concluded with a recommendation for Wag! to actively seek asset sales or consider selling the company entirely to mitigate shareholder losses. The lowered price target to $0.50 reflects the analyst's adjusted outlook for the company's stock.
In other recent news, Wag! reported financial results for the third quarter of 2024, which showed a decrease in revenue to $13.2 million, a 39% drop from the previous year, and an adjusted EBITDA loss of $1.9 million.
The company attributed these results to challenging marketing conditions, particularly changes in Google's search algorithms. However, Wag! noted a significant month-over-month revenue growth in its Wellness category for October and expressed its commitment to returning to profitability and achieving free cash flow.
In addition to these developments, Wag! reduced its debt by $5 million in Q3, which resulted in decreased interest expenses. The company's Q4 revenue is projected to range between $15 million and $18 million, with adjusted EBITDA expected to fall between a $0.5 million loss and a $0.5 million profit. Wag! is also considering the sale of assets, including the Dog Food Advisor and Cat Food Advisor websites, to improve its financial position.
The company is adapting its marketing strategy by diversifying acquisition channels and increasing its advertising spend on platforms like Meta (NASDAQ:META), TikTok, and Amazon (NASDAQ:AMZN). Wag! anticipates Q4 revenue between $15 million and $18 million, and it has set full-year 2024 revenue guidance at $70 million to $73 million.
The company plans to explore asset sales and aims to return to positive adjusted EBITDA in the coming quarters. These are the latest developments in Wag!'s efforts to navigate the changing digital landscape and return to profitability.
InvestingPro Insights
Recent data from InvestingPro paints a challenging picture for Wag! Group Co. (NASDAQ: PET), aligning with the analyst's downgrade. The company's market capitalization has dwindled to just $10.25 million, reflecting the severe market reaction to its financial struggles. InvestingPro Tips highlight that PET is "quickly burning through cash" and "operates with a significant debt burden," which corroborates the concerns raised about the company's financial stability and potential bankruptcy risk.
The stock's performance has been particularly alarming, with InvestingPro data showing a staggering 66.96% decline in just one week and a 90.75% drop over the past six months. This dramatic fall is consistent with the InvestingPro Tip indicating that the "stock has taken a big hit over the last week" and "price has fallen significantly over the last three months."
Despite these challenges, InvestingPro Tips also point out that PET has "impressive gross profit margins," which is supported by the data showing a gross profit margin of 79.58% for the last twelve months as of Q2 2024. This suggests that if Wag! can address its operational inefficiencies and debt issues, there may be underlying value in its business model.
For investors seeking a more comprehensive analysis, InvestingPro offers 18 additional tips for PET, providing a deeper understanding of the company's financial health and market position.
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