An investor won’t learn anything useful by comparing margins of a retailer to the margins of a consumer packaged goods company [and, as such, it is imperative that companies within each of the 5 cannabis-related sectors in the industry have their relevant metrics compared directly with each other to provide competent analysis. #munKNEE/Money!
The 5 primary cannabis-related industries investors can invest in at this point are:
- Consumer Packaged Goods,
- Real Estate and
and every “cannabis” company can and should be grouped into one of these verticals so they can be better compared and analyzed based on the metrics that are relevant for their respective business model:
- cost per pound for growers,
- sales velocity for CPG companies,
- ARR for software companies and
- same-store sales growth for retailers,
This is the most upstream…within the cannabis sector and consists mostly of Canadian Licensed Producers…The leading growers in Canada have an investability head start given their ability to list on Nasdaq and NYSE [and,] because of their compliance with federal law in Canada, they have been able to access huge sums of capital to fund their expansion plans.
Such a company, among many others, is:
- Canopy Growth (TSX:WEED; NYSE:CGC) – $11.7B Mkt. Cap
2. Consumer Packaged Goods
The companies in this…[sector] largely come from California and are now attempting to expand into additional regions. The winners…will lock down national agreements with retailers guaranteeing shelf space over a period of time [and,] following that, the sector will start to look and feel more like traditional CPGs.
Most of the future winners from this industry are still private and may contain the most opportunity for venture-type returns. A company in this sector is:
New Age Beverages Corporation (Nasdaq:NBEV) – $227M Mkt. Cap
3. Ancillary/Software[Companies in this sector…include non-plant-touching business focused on technology, distribution, payments and other services…[They] have been laying the groundwork for quite some time given their compliance with federal law [and, thus]…their ability to list on the U.S. exchanges….[As such, these] companies…have been afforded a significant head start to raise capital and capture market share… It will be very interesting to see if the existing companies will compete with the multi-nationals, be acquired by them or become obsolete because of them.
Companies in this sector, among others, include:
- CannaSys Inc. (OTCPK:MJTK) – $381M Mkt. Cap
- Canopy Rivers Inc. (TSXV:RIV) – $405M Mkt. Cap
- Cara Therapeutics Inc. (Nasdaq:CARA) – $1.03B Mkt. Cap
- Corbus Pharmaceuticals Holdings Inc. (Nasdaq:CRBP) -$252M Mkt. Cap
- KushCo Holdings Inc. (OTCPK:KSHB) – $256M Mkt. Cap
- Northsight Capital Inc. (OTCPK:NCAP) – $342M Mkt. Cap
- Scotts Miracle-Gro Company (The) (NYSE:SMG) – $5.6B Mkt. Cap
4. Real Estate
There is only one cannabis REIT, Innovative Industrial Properties Inc. (NYSE:IIPR) that is currently publicly traded while a handful [of others] have recently raised capital and are set to go public over the next year.
The key nuance for investors to consider [going forward] is whether the cannabis REIT is focused on cannabis retail real estate or cannabis agriculture real estate. The verdict is out as to which of the two will perform better over time as both have their merits.
- Retail real estate provides slightly lower returns, yet there is far more downside protection given the alternative use for the retail space, the defensibility and margin profile of cannabis retail.
- Agriculture real estate offers slightly higher returns in the near-term, but a deteriorating competitive dynamic and potential long-term margin compression.
This sector has the most defensibility and protection to its long-term economics as a result of:
- geographic zoning restrictions placed on cannabis retail businesses,
- the limited number of total licenses that a state/city allows and
- the ability for first mover retailers to establish consumer loyalty.
Cannabis retail will also be significantly more consolidated than other cannabis-related industries and will play out with one ultimate winner. The winner will be the retailer that:
- is able to establish the most trust with consumers,
- has locations in the most strategic markets across the U.S. and
- is viewed as the curator of the highest quality cannabis products…
A company in this sector includes:
- MedMen Enterprises Inc. (CSE:MMEN) – $385M Mkt. Cap
Make no mistake about it – the businesses [in the above sectors] are all early stage in a sector that is still nascent… The likelihood of a company in any of these sectors winning all starts with a commitment to focus….[but,] ironically, the public markets have actually been rewarding lack of focus. This has encouraged sub-optimal decision making at many of the top companies within each industry. There are:
- agriculture businesses purchasing distribution companies and coffee shops,
- investment businesses that are taking on operations of their investments and
- retailers buying CPG companies to distribute hemp CBD into mainstream retail.
These moves are being rewarded with stock price growth, despite the lack of synergy or long-term ROI. Growth for the sake of growth is fatal. The house of cards will eventually fall as it has for many first-movers in other industries. The lack of focus was eventually disrupted by second-movers witness to the mistakes and more mindful of strategic execution.
With separation of the five primary…[sectors mentioned] above, competent analysis with relevant metrics can be executed. An investor won’t learn anything useful by comparing four-wall margins of a retailer to the margins of a CPG company.