Sow Good Has Little Social Media Presence & Doesn’t Make Its Own Candy – Sell

Introduction: Candy Hasn’t Been Disrupted For A Reason

Usually, before I do research for an article, I have an opinion on the stock already formulated due to previous research I’ve done when I was trying to figure out if I would invest in it. That wasn’t the case for Sow Good (NASDAQ:SOWG). Through my due diligence, I’ve found holes in both the Sow Good bull and bear theses.

I will use my experience from my failed investment in Boston Beer (SAM) to compare the hype cycles of hard seltzer and freeze-dried candy. In the end, I decided I am bearish on Sow Good stock. Hopefully, Sow Good investors see I tried to think deeply and reinforce my points with facts even if they stay invested. It’s always nice when investors can respect a differing conclusion as well researched.

Sow Good is a micro-cap company focused on freeze-drying candy and desserts, which it sells in 5,850 retail locations (as of year-end 2023). The freeze dryers take individual pieces of candy or desserts and cook them. Through the use of extreme cold (-40 degrees), some heat (100-150 degrees), and very low air pressure, the dryers remove all the liquid from a food item, making it crunchy. The image below shows one of Sow Good’s ice cream sandwiches, which never melt since all the water has been removed. The label shows it has a 2-year shelf life. The firm’s chairperson Ira Goldfarb claimed in an interview freeze-dried candy can last 25-30 years. Either way, it can last much longer than regular candy, which has a 6-12 month shelf life.

Personally, I have not tried any of Sow Good’s products because I have never seen them at the store. I’m probably not the target customer, since I almost never eat candy. Regardless, my bear thesis has nothing to do with the taste being bad. I’m assuming they taste good, like most candy does. Few candies taste bad. Successful candy brands usually offer something unique, have strong branding, and amazing distribution. Hershey’s chocolate is nowhere near the highest quality chocolate you can buy, but it has one of the strongest brands in the world, and you can buy it almost anywhere.

Ira Goldfarb likes to discuss how the candy industry hasn’t been disrupted in a long time. This is because brands that have existed for decades offer nostalgia to adults, which has created loyalty. Furthermore, there hasn’t been anything dramatically different in the industry. The biggest changes have been new flavor combinations and more options that cater to people with dietary restrictions (sugar-free).

Even if freeze-drying causes a dramatic disruption in the candy industry, the traditional brands like Sour Patch Kids or Lemonhead can just freeze dry their own products. If you compare this to the electric vehicle disruption of the car industry, I’d argue it’s much easier to freeze dry an existing candy than to come up with battery technology that integrates inside an existing car. EVs often catalyze a redesign to optimize the space changes (no engine & added battery pack). With candy, freeze-drying is just adding one step after the product is made. Therefore, incumbents have a much greater advantage.

Sow Good Uses Co-Manufactures: Its Freeze Dryers Aren’t An Advantage

The father and daughter founders of Sow Good, Claudia (CEO) & Ira Goldfarb, previously ran a pet food company called Prairie Dog Pet Products. The duo wanted to use their freeze-drying expertise in a new category. After trying fruits and vegetables, the duo moved into candy which took off. Sow Good started with candy in March 2023 which is only about 18 months ago. Ira did an interview on the Planet Microcap YouTube channel. When discussing this quick startup period, the host asked Ira about the barriers to entry in the freeze-dried candy industry. Ira talked about management’s extensive experience in the freeze-drying industry which is highlighted by their experience with Prairie Dog. He also discussed how the firm makes its own custom freeze dyers that are “purposed built” to cook the candy better than the competition.

In the first 9 months of 2023, the firm used its own freeze dryers. However, starting in Q4 the firm started using co-manufacturers in Colombia and China. According to the firm’s May investor presentation, 47% of its production capacity was made by co-manufacturers in Q1. Even with the anticipated opening of its 324k square foot Dallas facility (which opened this summer), the firm expected its co-manufactures to produce about half of its candy in 2H 2024. Production in this case means cooking (freeze drying) the candy.

I believe the fact that Sow Good can contract production with manufacturers abroad, directly contradicts Ira’s argument that Sow Good has a moat due to its unique freeze-drying technology. We don’t need to do a taste test to determine if Sow Good’s freeze dryers are actually better than the competition. Sow Good itself thinks other freeze dryers abroad are good enough to use. Sow Good has exclusive partnerships with these international co-manufacturers. I understand there are limited co-manufactures with this capability (probably because it’s a small industry). My assertion is Sow Good’s freeze dryers don’t give it a competitive advantage.

Sow Good First Mover In Mass Production & Distribution + Cost Advantage

If Sow Good doesn’t have significantly better freeze-drying technology, then why does it have about 2/3rds market share in the freeze-dried candy category? Sow Good is a first mover at mass production (supply) and meeting the food safety standards needed for large scale retail partnerships (distribution). I will discuss why Sow Good’s food safety certification isn’t a long-term competitive advantage in a later section. However, getting initial distribution is critical because a newer freeze-dried candy brand needs to prove it sells better to replace it on store shelves (all while having less brand recognition because the new brand didn’t have that distribution).

Being a first mover in a new category can strengthen a brand because consumers might view copycats as inferior. However, the sheer number of competitors will erode some of Sow Good’s market share. I will discuss why having more freeze-dried candy brands popping up is probably a positive overall for the company (signals category growth) in a future section, even if their competitors will eventually take some market share within the category.

Sow Good’s ability to produce freeze-dried candy at scale with the required safety certifications isn’t the only reason it has gotten key retail distribution deals. Its other key competitive advantage over most other new brands is its low cost. Sow Good has deals with suppliers to get unbranded candy, has commercial-scale production facilities in Irving & Dallas, Texas, and orders large volumes from its co-manufacturers.

I challenge you to find a brand selling freeze-dried candy cheaper than the 4-ounce bag of rainbow bites Sow Good sells at Five Below (FIVE) for $5. There might be some you can find in-store that I haven’t seen online. If the category grows much larger, either existing brands like Lemonhead will enter the market (regular Lemonhead boxes sell for $1.5 for 5 ounces) and sell freeze-dried candy for a similar price or smaller competitors will make deals with unbranded candy suppliers at cheaper rates. Either way, Sow Good’s cost advantage won’t last. The longer Sow Good can maintain its cost advantage, the better chance it has at creating a lasting brand.

Sow Good Has Weak Online Marketing

Only 2% of Sow Good’s sales are from e-commerce. This means analyzing their web-traffic or social media trends won’t tell us how their future sales will do. However, their lack of e-commerce sales is an indictment on their marketing ability. Marketing isn’t one of Sow Good’s core competencies. That’s why the firm recently hired FINN Partners, which is a marketing agency that aims to help Sow Good develop a strategy. Marketing is probably the most important part of selling a new consumer packaged goods (CPG) product. Brands need to tell a story to connect with customers, driving repeat buying. It’s not enough to have a good tasting product.

Sow Good only has 877 followers on their TikTok account. In its annual report, the firm stated it got 4.5 million TikTok views from 3^rd party product reviews (as of year-end 2023). That’s not a lot of views at all. A competing brand, Candeeze Co. has 911.2k followers. Just one of their videos (of the couple starting the company) has 41.9 million views. Candeeze is one of the competitors that uses branded costly candies (Skittles). It charges $10 for a 5-ounce ($2 per ounce) rainbow crunch bag. On its website, Sow Good charges $6.99 for a 4.2-ounce bag ($1.66 per ounce). As I mentioned, at Five Below, 4-ounce Sow Good bags cost $5 ($1.25 per ounce).

Sow Good needs to tell a personal/family story like Candeeze does. Two other successful upstart CPG brands that come to mind are Mid-Day Squares which sells functional chocolate bars and Laird Superfood (LSF) which sells healthy coffee creamers. Mid-Day Squares tells a personal family story which has hooked in 150k Instagram followers. Sow Good only has 3k Instagram followers. Laird Superfood uses its namesake celebrity endorsement from Laird Hamilton, who has 540k followers, to market its products. It’s too late for Sow Good to get a celebrity endorsement like this because the celebrity wouldn’t be a part of its creation (inauthentic). The best they can do is collaborate with a celebrity on a new flavor. Sow Good is trying to tell its family story like Mid-Day Squares and Candeeze, but it isn’t going viral. In the last 28 days, Sow Good’s website only got 13.3k views (as of August 29^th).

Sow Good doesn’t have an Amazon strategy like Laird Superfood, which just reported 80% growth on that marketplace. Space Age Snacks’ Cosmic Crunchies has 2,952 reviews on Amazon, with 4.6 stars out of 5 (200+ bought in the past month). This compares to Sow Good’s variety pack of sweet squares, sour worms, and rainbow bites which only has 223 ratings with an average score of 4.3 stars (100+ bought in the last month). Cosmic Crunchies has 10.1k followers on TikTok.

It’s worth mentioning that Sow Good isn’t selling these candies directly on Amazon. A distributor called Hangry Kits is selling them. You can argue this is hurting Sow Good because Hangry Kits is labeling the rainbow bites as Skittles when they aren’t. Sow Good is missing out on a golden opportunity to push its product on Amazon. This variety pack is already named Amazon’s choice and over 100 per month are being sold. You can argue Sow Good’s poor marketing and lack of an Amazon strategy are opportunities, but I think they signal poor execution.

Online marketing/e-commerce is a multifront war with battles being waged on company websites, Instagram, TikTok, and Amazon. Sow Good is losing the war on all fronts. I don’t think FINN Partners will turn the ship around because the story needs to come out authentically.

Sow Good Doesn’t Make Their Own Candy (Yet)

Sow Good is a candy company that doesn’t actually make its own candy. This reminds me of how the original Tesla Roadster was based on a modified version of the Lotus Elise chassis. Tesla was a car company that wasn’t making its own cars yet. However, utilizing other brands’ car parts is common in the auto industry. It’s not common in the candy industry.

When Sow Good first started, it was buying branded candy like Candeeze which still uses Skittles. This is obviously very expensive. In Q2, 2024, Sow Good switched to buying its candy from unbranded suppliers. Starting at the end of Q1 2025, Sow Good will be making its own candy for 2 of its SKUs (stock keeping unit) in the chew candy category.

This is a little-known risk for Sow Good. It is about to move to its 3^rd candy supply. First, it switched from branded to unbranded candy (you can see the “S” in Skittles on branded candy). Soon, it will be making its own candy. Bringing candy production in house will likely lower costs. If these first 2 SKUs sell well, Sow Good will likely bring more SKUs in house. It’s clearly a risk to change the supply; taste is a key representation of the brand.

The Q2 Conference Call Flub: Analysis Of 3 Excuses

Sow Good had fantastic Q2 results, but the stock has plummeted 42% since the report. Specifically, Sow Good had 37% sequential sales growth ($15.6 million in sales) and increased adjusted EBITDA from $2.1 million to $6.2 million (also sequentially). The stock has fallen so much because Claudia said on the call that sales in Q3 would fall from Q2. Her explanation was inartful probably because she is inexperienced at running public calls. She gave 3 separate excuses. I think they are all valid, but they are still concerning.

Claudia’s first excuse was that heat caused the candies to melt in the trucks that didn’t have refrigeration. Then after Sow Good got refrigerated trucks, it realized the warehouses retailers use to hold the candy in inventory weren’t temperature controlled. The firm plans to fix this next year. If you are skeptical about this weather issue, just Google “Texas heat dome.” It seems the heat got worse in the 2^nd half of August after the call (which was the 15^th). The issue investors had with this explanation was that Sow Good’s retail partners felt they had significant stock to last them through July and August without impacting velocities. This excuse has nothing to with the sales weakness. It shouldn’t have been framed as part of the reason for the sales decline.

The 2^nd excuse was that the summer is a seasonally weak period for candy sales. Claudia said this is due to consumers going on vacation and being more health conscious. She mentioned kids going back to school would help sales in Q4, but kids actually go back to school in August and September, which is in Q3. The call was on August 15^th, so she didn’t know how sales were doing with kids in school at the time. Due to industry inexperience, she didn’t explain seasonal weakness as well as she could have, but I can explain it for her.

64% of total chocolate and candy sales are in the big 4 seasons which are Valentine’s Day, Easter, Halloween, and the winter holidays. The summer doesn’t have any of them. However, it’s worth noting that Easter was March 31^st this year. Easter holiday spending on candy benefitted Q1 instead of Q2 this year, yet Sow Good still had 37% sequential sales growth in Q2 over Q1. The firm should have been able to overcome seasonality in Q3 due to its expansion into new stores and its new products like it did in Q2, yet it couldn’t. That makes investors wonder if there’s a bigger issue in play.

The 3^rd excuse was the near 8% year-over-year decline in candy sales according to Nielsen. We don’t have a good year-over-year comparison for Sow Good because it is such a young firm. Last Q3 was their first one selling candy; they only had $5 million in sales. Ideally, the firm is small enough to take share at a higher rate than the industry is declining, but it couldn’t in Q3, which is a problem.

Specifically, Claudia said the firm is selling 2 fewer units per week per store (sequentially) at Five Below, for example. She didn’t tell us how many units per week each store sells, so I have no point of comparison. She should have told us the percentage decline. If we take her word that there was a slight decline, it shouldn’t have been enough to hurt overall sales. All the new store additions and SKU expansions should more than counteract a small decline at existing stores.

With that being said, Q3 isn’t an important period for candy companies. The most important period will be the 2^nd half of October during Halloween season. Sow Good plans to release 10 new SKUs such as lemon puffs, mint, chamoy, seasonal candies, and cheaper mini bags for trick-or-treating. Management should say how the season went on its Q3 call in mid-November. The Q3 weakness is priced in to the stock. Management’s explanation of Halloween sales will determine how the stock reacts to the report.

I’m Not Worried About New Freeze-Dried Brands, But Incumbent Candy Brands Are A Threat

I believe the number of upstart brands in the freeze-dried candy category increasing is a good sign for Sow Good because it means there is strong category demand. This reminds me of the hard seltzer category in the early 2020s. Some investors worried that the onslaught of new brands would be an issue as hype increased. Even Boston Beer talked about Truly’s market share within the hard seltzer category as a key performance indicator. This proved to be a mistake. The catalyst for the decline in Truly sales wasn’t the new hard seltzer brands. Instead, the problem was changing tastes. Consumers went back to drinking light beer. In the same vein, freeze-dried candy consumers might go back to eating traditional candy when the hype wanes.

To expand the analogy further, existing light beer brands like Bud Light entering the hard seltzer category is like if Sour Patch Kids, Lemonhead, Skittles, or Starburst made freeze-dried versions of their candy. It would be a positive if the freeze-dried category got large enough for the big players to notice. However, I think it will be much easier for Starburst to freeze dry their candy than it was for big beer brands to make their own hard seltzer.

Hard seltzer is a completely different product from beer, even though it is a flavored malt beverage. Freeze drying traditional candy brands just requires cooking them, which is what Sow Good used to do and what many small brands still do. It’s like if Truly was using Bud Light to make its hard seltzer. Some big beer companies had to create entirely new hard seltzer brands, like how Molson Coors (TAP) created Vizzy. Freeze-dried Skittles would be under the same brand umbrella. This is a long-term threat for Sow Good.

I’d argue Truly and White Claw had stronger brands than Sow Good has now, based on their social media followings. Currently, we are in the trial period of the hype cycle of a new product category. When it ends, we will see the true demand from repeat buyers. Children are a fickle customer base, similar to young adult hard seltzer drinkers. Freeze-dried candy trial customers might latch onto something new next year or go back to traditional brands. Sow Good doesn’t have the nostalgia factor brands like Starburst and Sour Patch Kids have. Ira compared freeze drying candy now to sour candy which was nascent in the 1980s in his Planet MicroCap interview, but that’s a flawed analogy. Sour is a flavor, while freeze-drying is only one type of crispy candy.

Healthy Eating Trends Don’t Matter

Candy is an enormous market; I am not concerned about healthy eating trends impacting Sow Good. The US non-chocolate confectionary market is projected to grow 8.3% in 2024, reaching $14.4 billion in sales. That means its growth is many times Sow Good’s projected 2024 sales of $52.7 million. Even if the industry was declining, it shouldn’t hold such a small company back. The firm only has 0.37% market share. The 8% industry decline Claudia cited shouldn’t have mattered.

Did The Hype Cycle Peak? A Hard Seltzer Analog

You would think it would be difficult to measure the freeze-dried candy category by looking at Google trends data, since a lot of sales are in-person at stores like Five Below and 7-Eleven. However, this is a hype cycle; it’s not like looking at something such as Hershey candy sales. People are researching what freeze-dried candy is. When they stop Googling, it signals the trial period is over. Freeze-died candy is a novelty snack that will likely have declining sales once it runs out of first-time trials.

As you can see from the chart above, freeze-dried candy search interest peaked in August 2023 which is a bad sign for Sow Good. As I mentioned, the category peaking is a bigger risk to Sow Good than new entrants. Hard seltzer is like freeze-dried candy in that a high percentage of sales are done in person either at the convenience store or at bars/restaurants. Yet, Google trends data still accurately timed the hype cycle.

Some might argue people making their own freeze-dried candy impacts the search data. However, I don’t think that many people are willing to buy a small freeze dryer for hundreds of dollars just to make candy they can buy at the store for a few dollars. The sub-Reddit where people make their own freeze-dried candy only has 200 members.

SQF Certification Is Not A Moat

In the YouTube interview I have been mentioning, Ira suggested Sow Good being SQF-II certified is a competitive advantage/moat. It takes about 6 months and is costly for small firms, but it’s not a moat according to an industry source (anyone can get it if they try). The only thing it does is temporarily prevent some smaller freeze-dried brands from getting large scale retail store distribution. Sow Good also is only SQF level 2 certified, but there are 3 levels to the certification. Level 2 measures food safety, while level 3 measures food safety and quality.

Sow Good Leases Facility From Ira Goldfarb

Investors should know Sow Good is leasing its 21k square foot Irving office/manufacturing facility from an entity entirely owned by Ira Goldfarb (lease expires September 2025). It’s not illegal to do a related party transaction if it’s disclosed (which it is). I just think some investors might have missed this. I’d rather this leasing agreement not be in place because Ira isn’t financially incentivized to get the firm the lowest lease rate.

Valuation: This Stock Is A Value Trap, Estimates Are Too High

Sow Good has 11.4 million diluted shares outstanding, which means the market cap is $133.4 million as of August 30^th. The firm has $14.4 million in cash on its balance sheet. In Q3, it reported $3.3 million in net income, which was $0.29 per share. Estimates call for sales to increase 82.2% to $95.96 million and for EPS to increase 208.3% to $1.48 in 2025. At the current share price, it trades at a 7.92x 2025 EPS estimates. That’s very cheap for a candy brand growing in the double digits. However, Sow Good isn’t really a candy company, since it doesn’t make its own candy (it will make some of it by 2025). It just cooks candy purchased from suppliers. I don’t believe Sow Good’s freeze driers give it a competitive advantage.

This is a quick growing microcap that just hit a bump in the road. It has a cost advantage over smaller freeze-dried candy players for now and the best distribution in stores like Five Below. If the freeze-dried candy hype cycle hasn’t peaked yet, Sow Good will have a solid Halloween season and the stock will spike to new highs. There probably is a couple year window where the category can grow without a traditional candy brand entering since it is so small. I’m curious if Sow Good is able to produce its entire candy lineup in house before traditional players enter. Since Sow Good is coming out with new SKUs faster than it is bringing existing products in house, it will take a while. It’s going to be difficult to maintain the same flavor.

Considering the execution and hype cycle risks, I can’t recommend the stock. With all the new retail locations Sow Good is entering, it shouldn’t have guided for sequentially declining sales in Q3, especially since Q2 didn’t get an Easter boost like it usually does. Claudia’s poor explanation and the potential for a weak Halloween season make the stock a sell. The freeze-dried candy craze reminds me of the hard seltzer craze a few years ago. If you sold Boston Beer stock after the first disappointing Truly sales report, you avoided a lot of losses in subsequent years. I think you will avoid similarly sized losses if you sell Sow Good now.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.