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Why the Bubs Australia Ltd share price rocketed higher today

The Bubs Australia Ltd (ASX: BUB) share price has had a stunning start to the week.

In late morning trade the fledgling specialty infant formula and organic baby food company’s shares are up over 9% to 70.5 cents.

Why are its shares higher?

This morning Bubs released its first-quarter update to the market.

That update revealed a 109% increase in gross sales on the prior corresponding period to $1.7 million. This was a 22% increase on the fourth-quarter of FY 2017.

Furthermore, thanks to the optimisation of product and channel mix, gross margins improved 119% on same period last year and 29% on the previous quarter.

According to the release, this growth was driven by increased infant formula sales in both domestic grocery channels and selected China cross-border e-commerce channels. First-quarter sales to China grew 274% versus the same period last year.

Bubs finished the quarter with a healthy cash balance of $18.2 million thanks largely to an oversubscribed capital raising that took place during the quarter.

Should you invest?

Whilst a 109% increase in sales sounds impressive, it is worth remembering that this is off a very small base.

In my opinion this growth does not yet justify its current market valuation and I’m reasonably surprised to see its shares surge higher today.

If sales growth does not accelerate greatly in the coming quarters then I do fear that its shares could come under pressure.

While I am reasonably confident that the company has positioned itself as well as it can to take on a2 Milk Company Ltd (Australia) (ASX: A2M) in China, only time will tell whether the Bubs brand will resonate with Chinese consumers.

I’ll be watching on from the sidelines with this one.

Instead of risking money in Bubs, I would suggest investors consider these fast-growing shares with bright futures.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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.

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