Investors are expecting big things from small brewer Craft Brew Alliance . The company has two fast-growing labels in Kona and Redhook, and its Omission brand is ahead of the competition in targeting the gluten-free beer market.

But it's not exactly smooth sailing ahead for this West-Coast beer maker. Its Widmer Brothers label has seen flat to negative sales growth in recent quarters. Its shares have also already been bid up to a price more than 200 times earnings. With that valuation, Craft Brew will need to put up better numbers than the 11% revenue growth it reported for the third quarter.

Growth won't come easy. It's operating in a hyper-competitive market, where it competes for shelf space and tap handles with local and regional brews, larger craft operators like Boston Beer , and super-heavyweights like Anheuser-Busch InBev , Molson Coors and SABMiller.


Has this craft brewer's stock gotten out ahead of its realistic growth potential? Or are Craft Brew investors getting in at the start of what could be a long run of success?

The bull case
Terry Michaelson, the company's outgoing CEO, says Craft Brew is "only scratching the surface of what we can accomplish as a uniquely positioned high-growth craft beer company." That unique positioning is key to Craft Brew's growth. It has had its biggest successes in the area of what it calls the "crossover drinker" -- basically, a convert from a beer like Budweiser, Bud Light, Coors, or Heineken.

Craft Brew, especially with its Kona and Redhook brands, isn't trying to go too big or too bold. It's delivering beers that are more interesting than the Bud-Miller-Coors pilsner-style lagers, but are still approachable to people who are used to the old American standards. That helps explain why Kona grew by 26% over last year, and Redhook, by 20%.

The company is also benefiting from the clever marketing partnerships it has in place. Redhook's Audible Ale has a famous pitchman in radio sports personality Dan Patrick. And it has a successful partnership in place to sell its Game Changer lager with Buffalo Wild Wings, the U.S. restaurant chain that pours more draft beer than any other.

The bear case
Craft Brew is undoubtedly selling at a frothy valuation after a big run in 2013. As the stock has been bid up, Motley Fool CAPS members have become less enthused. Back in January, when it was selling for under $7, CAPS members considered it a five-star stock. But as the price -- and multiple -- shot up this summer and fall, it was knocked down not one, but two notches to three stars.

If Craft Brew is going to assume the role of "high-growth stock," as Michaelson suggests, it needs higher growth. This is especially true when competitor Boston Beer is posting revenue growth of 30% over the prior year -- and while selling at a much lower earnings multiple.

Here's a look at how the trailing 12-month revenue has tracked for the two companies since December 2011:

SAM Revenue (TTM) Chart

Revenue (TTM) data by YCharts

Craft Brew also faces stiff competition for the crossover drinker. Its biggest foes are formidable. They come from A-B InBev, which has fast-growing craft-style beers in its Shock Top wheat beers and continues to expand its high-end Budweiser line in its Project 12 beers and Black Crown lager. They also come from MillerCoors, the U.S. partnership between Molson Coors and SABMiller. That company is the maker of the very popular Blue Moon crafty brand of beers, and also Leinenkugel, a brewer whose "shandy" summer beer shipments grew 24% over 2012.

The Foolish bottom line
Craft Brew has a lot of opportunity ahead. It's finding a niche among the larger craft brewers, focusing on the crossover drinker. But it does not have that niche to itself. In fact, it's pretty crowded. Coming quarters will be very important for Craft Brew. If it can maintain fast growth with its Redhook and Kona labels -- and bring Widmer Brothers back to growth -- it may be able to provide enough growth to satisfy investors. But at 236 times earnings, Craft Brew has no margin for error. It must meet investor expectations, or its shares could be in for a serious pullback. Investors should be cautious about this stock at these prices.

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The article Is Craft Brew Too Expensive? originally appeared on Fool.com.

John-Erik Koslosky owns shares of Boston Beer. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. 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.

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