Last July, global chocolate giant Hershey (HSY -1.11%) was the subject of a high-profile short report. The report was published by an analyst on Substack named Edwin Dorsey, otherwise known as The Bear Cave, on the internet.

In finance, shorting a stock means that you are predicting that the share price will fall. Dorsey's investment rationale for shorting Hershey was due to rising competition, particularly from social media phenomenon MrBeast.

Since publishing his Hershey report about a year ago, in July 2023, the chocolate stock has dropped over 20%. Moreover, in 2024, shares of Hershey have returned a measly 5% -- vastly underperforming the S&P 500.

Could Dorsey be right about MrBeast encroaching on Hershey's territory? Perhaps. Although his prediction has come to fruition for now, I'm going to make a case that the decline in Hershey's share price is attributable to a variety of other factors besides some adjacent storylines to MrBeast.

Moreover, after a thorough review of the company's operation and broader market opportunity, investors may be compelled to buy the dip in Hershey's stock right now.

Who is MrBeast, and why should Hershey investors care?

MrBeast is a 26-year-old social media influencer whose real name is Jimmy Donaldson. He has the most-followed channel on YouTube, with over 300 million subscribers.

The majority of MrBeast's videos revolve around obstacle courses and fun challenges whereby participants can win cash prizes or even high-price-tag goods such as a new car.

The reason Hershey investors may want to pay attention to MrBeast is because he owns his own chocolate company called Feastables. As seen in the video below, MrBeast went all out in his initial promotion of his chocolate company.

Inviting people to compete for a $500,000 cash prize inside a recreation of Willy Wonka's chocolate factory while also giving away your new candy product for free is a bold customer acquisition strategy.

Last time I checked, Hersheypark wasn't giving away hundreds of thousands of dollars to have fun.

How big of a threat are Feastables to Hershey?

On the surface, it may look like MrBeast just made the Hershey brand irrelevant. Bear in mind, however, that Hershey is a 130-year-old company. This is far from the first time the company has faced a new challenger.

According to data from Grand View Research, the global chocolate addressable market was estimated to be worth $119 billion in 2023 and is expected to grow at a 4.1% compound annual growth rate (CAGR) between 2024 and 2023.

There are a couple of things to unpack here. First, not only is the chocolate market enormous but it is expected to continue growing over the next several years. This trend implies that new entrants could enter the market relatively easily while also not necessarily being a detriment to incumbents.

Second, and perhaps more importantly, the addressable market figure above actually underestimates Hershey's total potential. While chocolate products are the company's core business, Hershey owns a variety of snack food brands such as Twizzlers, Skinny Pop Popcorn, Dot's Pretzels, Ice Breaker Mints, and Bubble Yum gum. By contrast, Feastables has less than a dozen chocolate bar flavors today.

Not only is Hershey a more diversified business, but as a truly global enterprise, the company also has superior distribution networks and strategic relationships with retailers compared to newer businesses such as Feastables. This plays a big role when it comes to fulfilling supply and demand as well as attaining optimal levels of shelf space in brick-and-mortar stores.

So, while MrBeast has certainly drawn attention to his chocolate bars, it's going to take more than clickbait to dethrone one of the longest-standing brands in the confectionary industry.

A person eating a chocolate bar.

Image source: Getty Images.

The real reasons why I think Hershey's stock is struggling

Over the last couple of years, the macroeconomy has weathered tough battles with abnormally high inflation levels. Although it's easy to forget, corporations are just as susceptible to an inflationary environment as consumers.

As the cost of goods rises, businesses incur higher expenses and then pass those on to to the consumer in order to maintain profit levels. For a candy company like Hershey, one of its most important costs revolves around the commodities market -- namely, cocoa prices.

During Hershey's second-quarter earnings call, CEO Michele Buck said that "the current cocoa price is not sustainable" and followed up by noting Hershey has "absorbed a lot of inflation already, but we do believe we need to pass some of it on."

In translation, Hershey's is going to need to raise prices across its portfolio. Of course, higher price mixes may lead to sales growth, but not necessarily for the right reason. For a business like Hershey, investors should want to see increasing transactions influence higher sales -- not forced price hikes.

Right now, Hershey's stock trades a price-to-earnings (P/E) ratio of 21.8 -- close to a 10-year low.

HSY PE Ratio Chart

HSY PE Ratio data by YCharts

While concerns over Hershey's ability to navigate inflation and rising competition are valid, I see both issues as short-sighted, and I'm not entirely surprised to see a sell-off in the stock as investors remain suspicious of the company's near-term prospects.

The company remains a dominant player in a large and growing market and is simply operating in a tough economic environment right now. For these reasons, I think Hershey is a compelling long-term buy at these valuation levels and think gains will be on the horizon sooner than investors realize.