The consumption of alkaline water has become a rather popular thing in recent years. Citing numerous supposed health benefits, consumers have flocked to the beverage. Whether the product actually has the health benefits its advocates suggest might not be as relevant as the fact that perception amongst so many is that it’s worth consuming. For those interested in this market, one company that is about as much a pure-play as possible is The Alkaline Water Company (WTER). With a market cap as of this writing of just $83.1 million, the firm is a small, niche company, but it’s one that investors should find interesting to at least watch moving forward.

Strong growth but weak fundamentals

WTER has, over the years, done really well to grow its operations. Consider the period of its 2016 through 2020 fiscal years. Back in 2016, the company generated sales of $7.1 million. This has since grown to $41.14 million. That implies an increase of 479.5%, or about 55% annually. Though growth has been destined to slow at some point, it was still robust at 27.8% from 2019 through 2020. Management cites strong sales of its alkaline water as the leading cause of this sales increase.

Despite economic weakness in the current fiscal year, the company has done reasonably well. In the second quarter of its 2021 fiscal year, the business generated sales of $10.76 million. This is 3% higher than the $10.45 million seen a year earlier. For the first half of the year, sales of $24.98 million are about 21.2% above the $20.60 million the company generated for the same time of its 2020 fiscal year. Management expects full year sales for 2021 of between $48 million and $52 million, with a midpoint then of $50 million. Here, sales would be about 21.5% above where they were in the company’s 2020 fiscal year.

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Over time, the firm has expanded into other products, though. In addition to selling alkaline water, WTER sells flavor-infused water. It also recently launched a line-up of CBD-infused products. Examples of the latter include beverages like its Blood Orange and its Peach Mango. Both are flavored water with CBD put in them. This opens the company up to another $20 billion (and growing) industry in theory.

Management has focused on other ways to grow their business too. E-commerce sales, for instance, have been made a priority of the firm. Through the first half of its 2021 fiscal year, sales through the platform were up an astounding 3,200%. The company is also targeting golf venues, vending machines, and other niche spaces. On top of this, the company boasted that its products are in 70,000 retail outlets, amounting to about 8% of all retail and hospitality outlets that are available. This is in addition to its national distribution program that has its water in all 50 US states.

While the kind of expansion WTER has been capable of achieving in recent years is great to see, one issue is that the business continues to hemorrhage cash. During its 2019 fiscal year, for instance, it generated a net loss of $8.62 million. This nearly doubled to a loss of $14.83 million during its 2020 fiscal year. Operating cash flow performed similarly. According to management, this metric came in at $8.13 million in the red in 2019. In 2020, it was in the red to the tune of $13.64 million.

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These kinds of losses and outflows have continued into the present fiscal year. In the second quarter alone, the company generated a net loss of $4.36 million. This compares to a loss of $2.93 million in the second quarter last year. Year to date, the picture is slightly better, with the firm’s net loss of $7.38 million coming in marginally lower than the $7.98 million seen a year ago. However, its operating cash flow picture continues to worsen, growing from a net outflow of $7.33 million in the first half of 2020 to an outflow of $8.11 million the same period this year. To fuel these outflows and losses, management has had to continually dilute shareholders. That can create a lot of pain even if the business achieves the success it’s after.

If the firm can continue growing its revenue, then it might be able to reach a size where it can generate a profit. Until then, it’s a highly speculative play. This issue is compounded by the simple fact that the science on the benefits of alkaline water doesn’t look too promising. According to the Mayo Clinic, claims of benefits come up short. Advocates say that the higher pH level of the water helps to neutralize acid in the blood stream, but evidence suggests that it may not actually have any material impact on acidity there. Some studies do show that it can help reduce bone loss, but it’s unclear if the effects are long-lived. And other claims that it can help with other diseases like cancer show ‘little credible evidence’. While it’s unlikely that the pH level will bring any adverse effects to its consumers, investors would be unwise to bank on it having any positive effects above and beyond what regular water offers.

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Right now, WTER is growing at a nice clip. However, the business is undeniably being hit by large net losses and cash outflows. If the science supported the company’s product, you could make the case that this is just a story of waiting for the firm to achieve the proper scale. Even in that case, the dilution investors will inevitably have to deal with could be painful. Add in the uncertainty about whether alkaline water is even useful in the ways that advocates claim, and this turns into an even more speculative prospect. For me, that’s too much to ignore.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.