The cannabis sector has a projected market opportunity topping $200 billion, but the companies that focus on large specific niches such as CBD might provide the best reward to shareholders. Charlotte’s Web Holdings (CWBHF) has the results to prove that focus pays off and the stock is near all-times highs for this reason. Investors waiting for a pullback might not get the opportunity to load up on this hot sector.
CWH actually reporting slightly disappointing numbers for Q2. The key being that reported revenues of $25.0 million missed analyst estimates by $1.2 million.
Investors can clearly overlook short-term blips as the company moves toward national CB rollouts with CVS Health (CVS) and Kroger (KR), amongst others. Not to mention, the company generated adjusted EBITDA margins of 16% and net income of $2.2 million.
Yes, while the big Canadian cannabis LPs lose tons of money building far flung operations across the globe, CWH has already generated a money machine. The company is focused solely on domestic CBD sales via either online sales or distribution partners. The company doesn’t need expensive stores either.
For this reason, top line sales growth isn’t nearly as impressive as other market participants, but the gross margins are much higher. Q2 revenues only grew 45% YoY, but CWH is near an inflection point with growth and 7%% gross margins. Analysts forecast quarterly sales to surge to nearly $60 million by next Q1 and to eventually top $100 million by the following December quarter.
From the June 2019 quarter to the December 2020 quarter, the CBD specialist will generate 300% quarterly revenue growth. Normal markets would salivate over this type of growth.
Reason To Focus
The reason to focus on a particular segment of the burgeoning cannabis market is the individual scale and sizes are massive. The domestic CBD market alone is projected to surge from ~$1 billion in 2019 to potentially $7 billion by 2023.
(Source: CWB presentation)
Too many companies are chasing the full $200 billon market opportunity to mounting losses and cash crunches. CWH has $51.4 million in cash and spent about $10 million in the first half of the year to build inventories. The company doesn’t have massive cash needs outside of building inventories to meet demand.
The CBD company already has distribution deals for nearly 8,000 retail locations. CWH has a deal with Kroger for 1,350 stores while the large retailer has double the retail locations leading to easy expansion for CWH once the grocery chain and the market is ready for a full national rollout.
The key investor takeaway is that Charlotte’s Web has already become a profit machine by focusing on a sole market niche with a market opportunity topping $7 billion in a few years.
The stock has a reasonable market valuation in the $1.8 billion range now with a ’20 revenue target of $300 million. A cannabis or CBD stock trading around 6x forward sales estimates is rather reasonable for the sector, but the volatile sector and complexities of a national rollout of a product where the FDA still has plenty of questions should provide some hiccups that send the stock lower and offer a better entry point for new investors.
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Disclosure: No position.