Cannabis Investing: Does Revenue Even Matter?Alan Brochstein, The Cannabis CapitalistNovember 6, 2017
Revenue generation is a key indicator, but it's not necessarily rewarded by investors in the short term.
In my first column for Leafly two months ago, I suggested that revenue generation should be a key consideration for any investor in the space and described a list of companies we are tracking at New Cannabis Ventures with sales in excess of $10 million per year.
In creating and updating this tracker, we decided to exclude companies that don’t file with the Securities Exchange Commission (SEC) or on Canada’s System for Electronic Document Analysis and Retrieval (SEDAR). We also include only cannabis-related revenue for companies that operate in other industries.
Today I want to dig in a little deeper and look at the big revenue generators in the United States. First, though, I want point out that generating significant revenue is not a guaranteed predictor of a rising stock price, especially in the short term.
When looking at start up companies like these it’s important to evaluate other factors like cash burn, the competitive landscape, management strength, access to capital, and strength of balance sheet. It’s also imperative to look at market capitalization (the value of the company), because sometimes the price of admission is just too high.
Revenue Is Just a Starting Point
So, which companies are generating big sales from cannabis?
In declining order, based upon the most recent quarterly update (typically the quarter ending June 30th), they are:
- Terra Tech (OTC: TRTC)
- Kush Bottles (OTC: KSHB)
- GrowGeneration (OTC: GRWG)
- CV Sciences (OTC: CVSI)
- MPX Bioceutical (OTC: MPXEF)
- mCig (OTC: MCIG)
- GW Pharma (NASDAQ: GWPH)
Please note that I have no holdings in any of these stocks, but GRWG, KSHB and MPXEF are clients of mine at New Cannabis Ventures. Inclusion in this article is not a recommendation.
Revenue: $3m to $6m Per Quarter
Terra Tech, which also sells hydroponic produce, generated $6.05 million in direct cannabis sales from the Nevada and California markets in Q2.
Kush Bottles, which offers packaging and services across the country, produced sales of $4.72mm in its Q3 ending 5/31.
GW Pharma has no US sales yet, but it hit $3.1 million in global revenue last quarter.
GrowGeneration, which operates hydroponics stores in California, Colorado, Nevada and Washington, reported sales of $4.11mm in Q2.
CV Sciences, which sells CBD products derived from industrial hemp and is developing a CBD/nicotine gum, generated sales of $4.08mm in Q2.
MPX Bioceutical (which just changed its name from Canadian Bioceutical and also trades in Canada on the CSE with the symbol MPX), has vertically-integrated cannabis cultivation and production operations in Arizona, Maryland, Massachusetts and Nevada. MPX produced sales in Arizona in its Q1 ending 6/30 of $3.99mm (C$5.11mm converted at $0.78 USD to the Canadian dollar).
mCig, which has moved beyond its original focus of low-end vape pens to a more diversified business, reported sales of $3.17mm in its Q1 ending 7/31, primarily from cultivation facility construction.
GW Pharma, which has received approval to sell Sativex in 30 countries, actually has no U.S. sales yet, as the drug isn’t yet approved for sale here. So perhaps it shouldn’t be on this list. The biotech firm, which just filed a New Drug Application with the FDA for its drug Epidoliex—to treat rare forms of childhood epilepsy that are intractable—generated global sales of $3.14 million in its Q3 ending 6/30.
Investors Aren’t Rewarding Revenue
I made the point earlier that rising sales aren’t a guarantee that the stock price will rise as well. To illustrate the point, consider the performance of the seven stocks discussed over the past six months. With the exception of Terra Tech, which is up less than 2%, the group has experienced serious declines, with CV Sciences and mCig dropping more than 39% since early May.
For those who want to explore this group further, it is quite diverse, with three direct cannabis companies, three ancillary plays and a biotech company. Each has varying growth rates, different degrees of balance sheet strength and access to capital and deviations in near-term profitability. GW Pharma, on one valuation extreme, has a market capitalization of about $3 billion, while CV Sciences is valued at just $17 million.
A final caveat: Sometimes companies lie—even those that file with the SEC. Older readers will likely recall the deceit that brought down Enron and WorldComm, and those who don’t should make themselves aware of the risk of accounting fraud. One of the earliest cannabis stocks, formerly Medbox and now Notis Global, was sued by the SEC earlier this year for fictitious sales. This is why it’s important to dig deeper than just a cursory look at a company’s publicly stated financials. My own review of Medbox resulted in my expression of extreme caution about the company from 2013 onward.
Bottom line: Investors no longer have to buy into the cannabis sector on hype alone, as several companies are now generating substantial revenue. Still, caution is warranted, even among this group, as investors should look beyond just this single factor.
Next up: A review of the upcoming earnings reports from the 2 leading Canadian cannabis companies in terms of sales, Canopy Growth and MedReleaf. Talk with you in two weeks.
Alan Brochstein is the founder of New Cannabis Ventures, an investment information website that may publish content on publicly-traded companies, but does not accept any form of compensation from them unless disclosed here: ABcann – Start date: 04/24/17 (as a public company), Aurora Cannabis – Start date: 10/1/16, MPX Bioceutical Corporation (formerly The Canadian Bioceutical Corporation) – Start date: 06/15/17, Canopy Growth Corporation – Start date: 10/1/16, DOJA Cannabis – Start date: 7/25/17, Emblem Corp. – Start date: 12/12/16 (as a public company), Emerald Health – 01/16/17-03/31/17, GrowGeneration – Start date: 01/01/17, Harvest One Cannabis – Start date: 04/01/17, iAnthus Capital Holdings – Start date: 04/20/17, Kush Bottles – Start date: 02/15/17, Liberty Health Sciences – Start date: 08/01/17, Maricann Group – Start date: 04/22/17 (as a public company), OrganiGram – 01/01/17-03/31/17, Solis Tek – 04/16/17-10/31/17, TerrAscend – Start date: 09/20/17, Therapix Biosciences – 03/22/17-07/26/17
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