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Bubs Australia Ltd shares are down almost 30% in less than two weeks

Unfortunately for its shareholders the Bubs Australia Ltd (ASX: BUB) share price has taken another sharp tumble during trade today.

At the time of writing the baby food and goat milk infant formula company’s shares are down over 9% to 78 cents.

This means Bubs’ shares have lost almost 30% of their value since peaking at $1.10 earlier this month.

What happened?

Bubs’ shares have come under significant pressure this week after one of its major shareholders offloaded over 6.8 million shares on market.

By doing so, Next Step Global Limited reduced its stake in the company to 12.4% from 14.6% previously.

Some investors appear to be interpreting this as a sign that its shares are overvalued and have headed to the exits in order to take profit off the table or limit their losses.

Are Bubs’ shares overvalued?

Based on its current sales Bubs’ shares are vastly overvalued. However, it has positioned itself extremely well to potentially grow its top line significantly in the future.

Through supply agreements with both major online e-commerce platforms and mother and baby stores in China, I believe Bubs has an outside chance of growing into its valuation in the future.

However, I have found its sales growth thus far to be reasonably underwhelming. For all the hard work the company has done in positioning the company, if Chinese consumers don’t take to the product as they have with a2 Milk Company Ltd (Australia) (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL), then these supply agreements count for very little.

In light of this, I don’t believe the risk/reward on offer at the moment is compelling enough to make an investment and suggest investors wait to see how its sales develop in the coming quarters.

In the meantime these top small-cap shares could be much better options.

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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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