Birkenstock priced its shares too high. Are they a better value now?

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Everyone else might have loved the Barbie movie, but Birkenstock Holding PLC BIRK-N investors seem to be resisting its charms.

The German footwear company grabbed a lot of attention in the runup to its listing on the New York Stock Exchange after an initial public offering that concluded earlier this month.

The brand enjoyed a cameo in this year’s Greta Gerwig-directed hit film, when a character presents the functional, brown sandal of the real world as the ideal contrast to the pink stiletto of Barbie Land.

This was marketing gold, and it arrived at a time when Birkenstock has seen an upsurge in its popularity.

The brand has ties to high fashion. L Catterton, an investment company tied to Bernard Arnault, the chief executive officer of luxury brands group LVMH Moet Hennessy Louis Vuitton SE, owns a large stake in Birkenstock – suggesting people who know haute couture think that the products may resonate well beyond the sandal-and-socks crowd.

Birkenstock’s revenues increased by more than 70 per cent from fiscal 2020 to fiscal 2022. Its gross profit margin, which compares the cost of making a sandal to revenue from selling one, expanded from 55 per cent to 60 per cent over this two-year period.

The timing of the IPO takes advantage of these trends. And while many investors are enthralled by the promise of artificial intelligence, Birkenstock – which still makes its cork-soled sandals in Germany – may have appealed to investors enthralled by simpler concepts.

But what a fumble: The stock closed in New York at US$36.40 on Friday, down US$9.60 from its US$46 IPO price.

The company that was valued at US$9.3-billion earlier this week now has a market valuation of about US$7.4-billion, raising questions about whether the shares were overpriced at the start.

Brian McGough, an analyst at Hedgeye Risk Management, an investment research firm based in Stamford, Conn., believes they were.

“DO NOT chase this stock today. It’s worth $30,” Mr. McGough said on X (formerly Twitter) on Wednesday. He could not be reached for comment.

Birkenstock arrives on the stock market at a difficult time for new listings, as risk-averse investors have significantly cooled the market for IPOs in general amid continuing concerns about the economic effect of high interest rates.

According to Renaissance Capital, there have been 88 new listings in the U.S. market in 2023, led by Arm Holdings PLC. That’s up from 71 new listings last year. However, activity is still well off the recent high in 2021, when there were 397 IPOs. In 2020, there were 221 offerings.

“Naturally we’re hearing questions about investor demand. But actually we still see plenty of demand for strong companies priced attractively,” Matthew Kennedy, senior IPO market strategist for Renaissance Capital, said in an e-mail.

He added: “Birkenstock has great fundamentals, but its offer price valued it at a premium to most public peers. In addition, we saw headwinds on technicals, specifically weak trading from apparel peers and recent IPOs.”

Indeed, Birkenstock’s listing follows an uneasy time for similar consumer discretionary stocks.

Nike Inc. has shed 44 per cent of its value over the past two years. Allbirds Inc., the sustainable shoemaker whose share price jumped 64 per cent on its first day of trading in November, 2021, has seen its share price collapse since then. The price is down 61 per cent this year alone.

Many companies that rely on healthy consumer spending have been struggling with rising costs, disappointing sales and discounted inventories, as high interest rates weigh on consumer confidence.

Birkenstock is exposed to similar risks, and bearish investors may be concluding that the Barbie cameo marks the peak of the brand’s popularity. The next step, according to this skeptical view: disappointment.

Still, the two-day selloff suggests that the stock is no longer riding a wave of hype, and the lower-priced stock may look attractive.

Aswath Damodaran, a finance professor at the Stern School of Business at New York University, who often looks at stock valuations, examined Birkenstock’s intangible assets in a recent YouTube video.

Mr. Damodaran came to an upbeat conclusion: The company’s intangibles include valuable brand uniqueness, celebrity endorsements and strong executive leadership – oh, and his view that the “Barbie bump” will translate into a larger customer base that will drive sales over the longer term.

While the IPO price may have valued the company aggressively, his approach to valuation pointed to a compelling buying opportunity if the share price fell below US$42.

Birkenstock’s share price may have launched in Barbie Land, but now it’s in the real world.