Creating Value in the Cannabis Industry

This is a copy of the September 15th edition of our weekly Newsletter, which we have been publishing since October 2015.


We were speaking this week with the Chief Strategy Officer at a cannabis operator to learn more about the company’s plans and were quite intrigued to hear about its approach. In essence, the company wants to focus specifically on agriculture, serving as a white-label product provider to brands. This is certainly at odds with what we hear from most of the American operators, who want to focus on either brands and/or retail and who predict the cultivation and production side will become commoditized relatively soon. Our takeaway is that there are lots of ways to potentially create value in the industry, but the key will be for companies to explicitly define and refine their strengths and then execute.

Last week, we discussed how the American multi-state operators (MSOs) are beginning to differentiate in several different ways, and we touched upon the different types of value creation as one of those aspects. Today, we want to extend upon that theme. If the majority of operators do follow through by de-emphasizing cultivation and even manufacturing, then perhaps there will be tremendous value creation by those who simply excel at large-scale cultivation and manufacturing. A cannabis industry supported by substantial contract manufacturing to create the products of CPG companies would make it similar to most other industries. This business model is becoming increasingly feasible, as previously many of the states were forcing vertical integration, although some still do. Additionally, given the costs of replicating cultivation and manufacturing facilities state-by-state given the current inability to ship product across state lines, the MSOs that want to focus on creating brands might be best served to save the capital required to do build facilities and embrace contract manufacturing.

In Canada as well, we are seeing companies pick different paths to value creation. We have discussed in the past that most Canadian provinces essentially locked out the licensed producers (LPs) from retail, which we still see as an area that continues to be underappreciated by the market thus far. Retailers in Canada will take a big share of the total revenue, in our view, as they end up potentially owning the customer. Among the LPs, we are also seeing companies take different approaches. One recent example is the new class of extraction companies, which include several that have scaled up quickly with strong revenue and much better levels of profitability than the cultivators. Among the LPs that are focused on cultivation and production, some have pursued the export market or participation in markets outside of Canada, including a few that are CSE-listed and pursuing opportunities in the U.S. The focus beyond Canada is a potential way to create additional value. Further, several LPs are purposefully minimizing their cultivation footprint to focus more on branded products that will soon be permissible. So, just like in the U.S., there are several different ways to create value in Canada.

We will likely see even more differentiation among the cannabis operators, many of whom tell essentially the same story today. We think it’s early to confidently project which models will win over time. For investors, it’s very important to understand in which part of the supply chain companies intend to excel and to better appreciate differences that will emerge. We will be publishing a thought leader guest post tomorrow that suggests the need for investors to understand the key performance indicators for the different sectors, which we think is a timely discussion given the focus on differentiation we anticipate.

Based in Sonoma County, California, GABY is a U.S. focused consumer packaged goods (CPG) company with a manufacturing and distribution license in the state of California. With these licenses, and with relationships in over 3,400 retailers in the mainstream grocery sales channel, GABY is taking a unique approach to cannabis and hemp-infused products by bridging the gap between the licensed dispensary and mainstream markets.

To learn more, visit GABY’s Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Get ahead of the crowd! If you are a cannabis investor and find value in our Sunday newsletters, subscribe to 420 Investor, Alan’s comprehensive stock due diligence platform since 2013. Gain immediate access to real-time and in-depth information and market intelligence about the publicly traded cannabis sector, including daily videos, weekly chats, model portfolios, a community forum and much more.

Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index.

View the Public Cannabis Company Revenue Tracker, which ranks the top revenue producing cannabis stocks that generate industry sales of more than US$5M per quarter.

Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.

Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.

Find your place in the cannabis industry by visiting our Careers and Jobs Page and learn which companies are hiring aggressively.

Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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