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The Secret Behind Nasdaq's Hottest U.S. Marijuana Stock IPO Ever

Greenlane Holdings (NASDAQ: GNLN) on Thursday had the best initial public offering (IPO) performance by a U.S. marijuana stock on the Nasdaq stock exchange. Pulling off the feat was easier than you might think. Why? Greenlane was the Nasdaq's first IPO for a U.S.-based company that operates in the cannabis industry.

How did Greenlane become the first? There's a simple explanation -- sort of.

IPO written on a chalkboard with a hand holding a paper airplane with the appearance of flames drawn on the chalkboard behind the paper airplane over clouds.
IPO written on a chalkboard with a hand holding a paper airplane with the appearance of flames drawn on the chalkboard behind the paper airplane over clouds.

Image source: Getty Images.

O Canada, but no U.S.

Cronos Group (NASDAQ: CRON) became the first marijuana stock to trade on the Nasdaq in February 2018. Marijuana producer Tilray (NASDAQ: TLRY) wasn't too far behind, conducting its IPO on the Nasdaq four months later.

Both Cronos and Tilray enjoyed big gains right out of the gate, but both are Canadian-based companies. This week, Greenlane became the first U.S.-based company that operates in the cannabis industry to list on the exchange.

It's not that there's a lack of U.S. marijuana companies that would love to list on the Nasdaq. But Nasdaq prohibits companies that have operations that violate U.S. federal laws from listing their stocks on its exchange, and marijuana remains illegal at the federal level in the U.S.

This listing requirement wasn't a problem for Cronos and Tilray because neither currently conducts business in the U.S. Greenlane, however, does do business in the U.S. So how did the company manage to list its shares on the Nasdaq?

Greenlane is a leading distributor of vape products and accessories. Its products can be used -- and are used -- for nicotine vaping. The products can also be used for vaping cannabis and cannabis derivatives. The important distinction here is that Greenlane itself doesn't violate any federal laws, even though customers who use its products could.

An impressive start

Greenlane's IPO has gone exceptionally well so far. The company sold 6 million shares at $17 per share, immediately raising $102 million. And that was only the start.

The stock soared as much as 70% in intraday trading on Thursday. Although Greenlane subsequently gave up some of those gains, its share price was still up 24% as of Thursday afternoon.

Based on Greenlane's total number of outstanding shares (including those not offered for sale in its IPO), the company's valuation is now greater than $2 billion. That might seem steep for a company that made only $179 million last year.

However, compared to many marijuana stocks, Greenlane is a bargain. Cronos Group and Tilray, for example, claim market caps of $5.3 billion and $4.7 billion, respectively, but their combined generated sales over the last year were only around one-third of Greenlane's total revenue.

Beyond the hot IPO

The biggest question is this: Can Greenlane keep its momentum going? The feverish pace of gains seen on its first day of trading will likely moderate, but there are several reasons to be optimistic about the company's long-term prospects.

Vaping is growing in popularity. The legalization of hemp in the U.S. is increasing demand for vaping products for hemp-based cannabidiol (CBD) products, and sales for vaping products should soar even more as additional states legalize recreational marijuana. Greenlane should benefit from these trends.

In addition, the company has opportunities to expand into international markets. Greenlane currently focuses on the U.S. and Canada. It ships products in limited volumes to customers in Europe, Australia, and parts of South America, but these markets could grow significantly in the future.

It's possible, though, that Greenlane won't remain the only U.S.-based marijuana stock on the Nasdaq for too long. Legislation has been introduced to both houses in the U.S. Congress to change federal marijuana laws so that individual states can enforce their own marijuana policies. If this bill passes and is signed into law, investors can expect a flood of potentially hot IPOs to follow in Greenlane's footsteps.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.