We came across a bullish thesis on The ONE Group Hospitality, Inc. (STKS) on Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on STKS. The ONE Group Hospitality, Inc. (STKS)’s share was trading at $3.44 as of Nov 5th. STKS’s trailing P/E was 25.47 according to Yahoo Finance.
A single diner enjoying an elegant meal in a sophisticated restaurant setting.
If the U.S. is entering a period of consumer discretionary outperformance, The One Group (STKS), a luxury restaurant operator, may present a unique opportunity. STKS owns brands like STK Steakhouse and Kona Grill and recently completed a transformative acquisition of Benihana and Ra’s Sushi. This deal, completed in March, catapults STKS to a $1 billion revenue run rate, yet the company remains undervalued with a market capitalization of only $106 million. The first complete quarter of combined operations is set to be reported soon, and could showcase a significant revenue bump—potentially 15% to 30% quarter-over-quarter—driven by the acquisition’s inorganic growth. Additionally, with a one-time $10 million charge tied to the merger last quarter, net income may show notable improvement in the upcoming report.
STKS currently trades at less than 1x its combined trailing twelve-month EBITDA of approximately $117 million, an unusual valuation for a company of its scale. However, the acquisition brought substantial debt, including $350 million at SOFR + 6.5% and $160 million in preferred stock, which weighs heavily on the company’s financials. Although revenue is growing at an impressive 33% annualized rate since 2018, paying down this debt will be critical, especially as management continues expanding with new locations. Still, the aggressive sales growth and simultaneous stock price decline make STKS an intriguing, albeit risky, prospect.
An activist investor holding a 15% stake in STKS has pushed for share buybacks since 2021, resulting in $17 million in repurchases so far. Given the high debt, further buybacks may take a back seat to debt reduction in the near term. Founder Jonathan Segal remains involved as board chairman and has shown confidence through insider buying, a positive indicator. STKS also operates a turnkey solutions business, managing 8 venues for hotel chains out of its 168 locations, which diversifies its revenue streams.
Despite current thin margins, STKS has the potential for substantial upside. If profit margins, currently only covering interest expenses, return to historical levels of around 10%, the company could generate around $100 million in net income annually. Such profitability would easily cover interest obligations and support debt reduction. Given its revenue growth trajectory, STKS has the potential to achieve a price-to-sales ratio of 1x, which could make it a ten-bagger over time. While promising, this investment requires close monitoring each quarter to track margin recovery and debt repayment progress, making it suitable for risk-tolerant investors.
The ONE Group Hospitality, Inc. (STKS) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 6 hedge fund portfolios held STKS at the end of the second quarter which was 8 in the previous quarter. While we acknowledge the risk and potential of STKS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STKS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.