Yowie Group Ltd (ASX: YOW) shares were heavily sold off on Monday following the group’s latest quarterly report, and shares have dropped 20% in two days, and 42% in the past month.

Is there a buying opportunity here, or are investors better off on the sidelines?

I tend to lean more towards the ‘Buy’ side of the scale, but there’s significant uncertainty, as I’ll show below:

Tough business conditions

Analyst price targets for Yowie were around $1.20 – $1.50 in the lead-up to Monday’s report, suggesting the company is undervalued today. However, the most recent quarter also saw a near 25% drop in sales, which was surprising considering the recent addition of several thousand partner stores to Yowie’s retail seller network.

Management has attributed this to the effects of Easter being in the previous March quarter (resulting in a dramatic spike in chocolate demand then compared to now), however, June sales were also 20% behind the December quarter. This is concerning.

Yowie stated that ‘average performance across all Walmart stores continues to surpass Walmart’s required benchmark average in the front end sub-category‘. The inclusion of this line makes me wonder if sales performance has been slower than expected, or alternatively management is reassuring investors that sales continue well – it’s tough to say which it might be.

Looking to the future

While sales were lower, marketing, staff, and materials expenditure rose significantly which suggests that the company is expecting increased demand going forwards. Establishment of a second production line was mentioned in the latest quarterly report. Hiring an experienced Chief Operating Officer and Chief Executive Officer is also likely to prove valuable to the company, given the latter’s experience at Hershey and Cadbury Schweppes.

Digital and licensing efforts also seem to be progressing with an uplift in Youtube views, website visits, and app downloads. The cynic might note that Yowie’s marketing spend was higher, potentially causing these views, rather than the increase being the result of growing brand awareness. A strange fact that jumped out at me was that, for whatever reason, Russia accounted for 6% of Yowie App downloads.

On another front, six individual Yowie character books are being prepared for launch into the US market in 2017. They are expected to feed viewers into associated webisodes, but asides from building brand recognition and engagement I’m not sure how profitable they’ll be.

So…???

For every positive above, it seems there’s a ‘well, maybe it won’t turn out the way we expected‘. On balance I still believe Yowie is a buy, as I estimate it is has enough cash for around three years of operation at current rates. It’s also significantly below where I first bought shares ($1) even though the situation has de-risked itself with new executives, lots of cash, and a better manufacturing capacity.

So I’d still call it a buy, but it’s higher risk and only for those who will keep an eye on it.

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Motley Fool contributor Sean O'Neill owns shares of Yowie Group Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.