- Marijuana is going mainstream, and this $120 billion market globally will soon be emerging from the shadows. Any marijuana supply in the coming years will undoubtedly be spoken for as demand for recreational and medical skyrockets in North America.
- Public marijuana companies trade at high valuations because of their future sales potential. One way to quantify that potential is through production capacity, measured in square feet and kilograms of output. Many of these companies are transparent about what they have and hope to have.
- Based on this measure, INLB appears to be an attractive new public player as they double their cultivation/production capacity in the U.S. in the coming months. It's an undiscovered name and could see significant action as investors realize this American company has a strong balance sheet and capacity is growing quickly.
NEW YORK, NY / ACCESSWIRE / November 21, 2018 / As marijuana goes mainstream with recreational legalization in Canada and parts of the U.S. plus medical use throughout an increasing part of the world, there's little doubt that any available supply will be snapped up quickly. According to most estimates, cannabis is a $120 billion industry including both legal and illegal consumption.
Because of the market potential, companies that operate in this space are commanding big valuations even with small sales figures and no profitability. As a multiple of sales, companies like Aurora Cannabis Inc. (ACB) and Canopy Growth Corp. (CGC) have Price/Sales multiples of over 100. Tilray Inc (TLRY) is over 300!
These are off the charts, but there's a reason. Cannabis companies are being valued based on their far-in-the-future sales potential, a product of just how much cannabis and related products they can churn out in the coming years. These companies are reporting their revenue-per-gram and cost-per-gram for a reason.
Current and future production capacity may be a better measure of the cannabis industry's potential. Looking at how these companies stack up, there are some intriguing takeaways.
Production Capacity Will Be The Key To Future Success
A comparison of similar companies in the marijuana industry gives perspective to how investors think about their future.
Canntrust Holdings Inc (TSX V: TRST) is a cultivator/producer that reported revenues of $12.6M in Q3 2018, or $48 million annualizing this quarter. They're set up for a major bump in revenue in the coming years as they're expanding their production facility to 450,000 sq. ft. The company is valued by the markets at $990 million.
Harvest Health & Recreation Inc (HARV) went public through a reverse merger in November at a market valuation of $500 million. They're an Arizona-based company, and investors have high expectations for future growth. The company had 35,000 sq. ft. of cultivation facilities and generated $18 million in revenue in the first half of 2018. They have licenses to begin production in numerous other states, and the company expects to have 720,000 square feet of production space by 2020.
Newstrike (HIP) is a Canadian company with 14,000 square feet of active production facilities that can produce 2,500 kg of marijuana each year, for sales capacity of about $22.5 million annually at a per/kg price of $9,000. They're working on an expansion project that should be online in 2019. Today they have a market valuation of about $200 million.
Item 9 Labs Moving Up In the Marijuana Mecca, U.S. Southwest
The recently public Item 9 Labs (INLB) has a growing marijuana cultivation and production business based on a 50-acre property in Arizona with a focus on upscale products. The property includes a 10,000 square foot, state-of-the-art indoor manufacturing facility with 10,000 square feet of additional capacity under construction for completion by the end of the year. They're planning another production facility in Nevada after receiving production/distribution licenses in 2018. As a result of the company's focus on organic farming techniques, Item 9's medicinal products sell at a price that is 5-10% higher than local competitors, making them a boutique provider.
The company was just capitalized through a substantial investment from The Viridis Group this fall of up to $7.7 million. For a small company, it's a clear vote of confidence, and they recently added Sara Gullickson as President. Gullickson is the founder and CEO of Dispensary Permits and was selected as a Top Ten Cannabis Entrepreneur by Herb Magazine.
At $1.50 INLB has a $80 million market value, despite having a production capacity nearly that of Newstrike (TSX V: HIP); yet this equity is being valued at less than HALF the price. The difference in market value may simply be a matter of awareness. INLB has only been public for a few months. As their new production facility comes online in 2018, and more is added in 2019, it INLB could be worth $200 million or more, like HIP.
Small-caps have risks, and the marijuana space is a high-risk high-reward industry. But as investors pick up on the price disparity, INLB is a cannabis name to keep an eye on in 2019.
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