Is Krispy Kreme an Underrated Buy or Just the Latest Meme Stock?

Key Points

• Krispy Kreme's stock has skyrocketed in the past month, without any clear catalyst.

• The company recently announced an end to its partnership with McDonald's.

• Its growth rate has been declining in recent periods, and it has struggled with profitability.

• 10 stocks we like better than Krispy Kreme ›

Shares of Krispy Kreme (NASDAQ: DNUT) have been on fire recently, rising more than 50% in the past month (as of July 28). The company doesn't report earnings until next week, but the lack of a catalyst hasn't stopped it from becoming one of the hottest buys on the market of late.

Are investors buying the stock because it's a bargain buy that's been overlooked and has a lot of potential upside, or is Krispy Kreme just the newest meme stock for speculators to bet on?

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Image source: Getty Images.

Krispy Kreme stock is rallying at an odd time

What's particularly perplexing about Krispy Kreme's recent run up in value is that it has happened amid some bad news for the business. In late June, the company announced that its partnership with fast food giant McDonald's was coming to an end. Krispy Kreme's donuts have been available at 2,400 McDonald's restaurants. However, it hasn't proven to be a profitable venture for Krispy Kreme, as the companies say they "jointly decided" to end their partnership as of July 2.

An end to a partnership with the most popular fast food restaurant in the world may seem like it should have been bad news for Krispy Kreme stock, but the news didn't derail it. The day that announcement came out -- June 24 -- the stock closed at $2.60, and despite the bad news, it has soared by well over 50% since then.

Krispy Kreme's financials don't look good

The big concern with Krispy Kreme's business right now is that there's more attention than ever on healthier eating. With GLP-1 drugs curbing appetites, Krispy Kreme's sweet donuts may also not be as appealing as they may have been in the past. The numbers do seem to corroborate that.

DNUT Operating Revenue (Quarterly YoY Growth) data by YCharts.

The company's sharp decline during the first three months of the year looks troubling. It looks worse than it is, as Krispy Kreme's recent divestiture of Insomnia Cookies affected those results. Organically, its revenue declined by a much more modest rate of 1%. But at the very least, investors can see that the company has been struggling to grow its business of late. That can be a cause for concern, especially in light of its partnership with McDonald's coming to an end.

Another problem is the lack of profitability at Krispy Kreme. In the trailing 12 months, it has incurred losses totaling $21.7 million on revenue of $1.6 billion. And in three of the last four years, the company's bottom line has finished in the red.

Is Krispy Kreme a bargain buy, or a meme stock?

One red flag involving Krispy Kreme stock is that short interest as a percentage of its float has risen to around 35%. It's an extremely high percentage, which shows that many people are betting against the stock. When you combine that with a sudden surge in value, underwhelming financials, and the company struggling with profitability in recent years, it certainly does appear that Krispy Kreme has turned into a bit of a meme stock.

Its valuation has crumbled this year, with the stock down nearly 60% since January. While some investors appear willing to take a chance on the stock, there's plenty of risk and uncertainty that come with doing so. Until and unless Krispy Kreme can prove it can get back to growing its business and doing so while turning a profit, you're likely better off putting this food stock on your watch list rather than in your portfolio. Krispy Kreme might become a good investment someday, but it isn't one today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.