What Cannabis is a disruptor agent towards pharmaceutical, alcohol, and sport recovery [products]."
Whether you are pro or against Cannabis and its legalization, what Bruce said in the quote above summarizes the opportunity and what many investors are excited for. It's not just the stock market that is excited about the potential. Things are no different in the world of start-up investing. No weeks go by without a few Cannabis startups showing up in the flow of the deals that come your way, if you are into startup investing. The excitement doesn't stop there. Consumer packaged goods and beverage companies are moving in. Constellation Brands, Coca-Cola, and Molson Beer are a few such companies that have already signed a deal and are pouring investments into the Cannabis market for an early entry into cannabis-infused consumables and products. When there is excitement, inevitably prices are pushed up, and irrational exuberance penetrate the air. Is there any real fire behind all the smoke and mirror?
On today's edition of Stock Card Weekly, we are looking at three cannabis companies at three drastically different price to sales ratio (whoa?) to see which one is worthy of a spot on our watchlist and ultimately finds its way into our long-term portfolios. Today's contestants are: Aurora Cannabis Inc, Canopy Growth Corporation, Tilray Inc.
Note: All numbers stated are based on the last available data on 9/29/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
Before we move on, did you say "woah" when you read we are using price to sales ratio to compare today's contestants for the watchlist-worthy battle of marijuana stocks? If you don't know why and what that means, maybe you should consider joining the How To Invest University ;)! Anyways, most commonly, we use price of a stock per each dollar of its earnings to see how high or low a stock is priced. It is referred to as Price to Earnings (PE) ratio. Today, because most Cannabis companies have no earnings or unreliable earnings, we opt to use Price to Sales ratio which indicates the price of a stock per each dollar of sales it makes. It's still a credible way of evaluating how expensive a stock is. Alright, let's move on!
$ Aurora Cannabis Inc (Price to Sales ratio: 104.17)
Aurora Cannabis (ACBFF) is the marijuana partner to Coca Cola (KO).The deal was closed just recently, and it is perceived as a stamp of approval for the company's strength as a market leader. Additionally, Aurora Cannabis seeks to be 'Amazon' of marijuana. In May of 2018, the company announced its plan to acquire MedReleaf. This gives Aurora Cannabis access to four additional geographical markets. As per its Founder and CEO Terry Booth, Aurora Cannabis has plans for further expansion through acquisitions. Despite all the excitement and being the cheapest-priced company in today's battle, the company spends $0.10 billion to generate $0.04 billion in revenue and $-0.17 billion in free cash flow. The challenges in front of the investors in this company and the majority of companies in this sector are dilutive convertible notes, negative cash flow and uncertainty related to legalization of marijuana in the U.S. and globally.
Visit Aurora Cannabis' Stock Card
$$ Canopy Growth Corporation (Price to Sales ratio: 142.56)
Canopy Growth Corporation is one of the largest producers of medical cannabis with operations across 11 countries around the world. It is also the first company that was able to conceive major non-marijuana player to take a chance on the growth opportunity in the market. Constellation Brands is a partner and investor in the company and together the duo have their eyes on the cannabis-infused beverage market. Despite the signs of strength, the company spends $0.09 billion to generate $0.06 billion in revenue and $-0.20 billion in free cash flow. Canopy Growth reported annual and Q4 earnings in June 2018. Its annual revenues increased by 95% year on year. The company is growing at a fast rate, with expansion in Africa, Europe and Australia. It recorded excellent Q4 revenues in Germany. The company recently launched Spectrum Softgels which boosted its sales. A range of patented cannabis-based medicines by Canopy Health Innovations recently received approval to conduct its first trial, in a planned series of clinical trials. This is a big step forward for the company. No wonder the stock is priced higher than Aurora Cannabis. Canopy Growth has its eye on the most diverse possibilities of growth, both across different product categories and across several geographical market.
Visit Canopy Growth' Stock Card
$$$ Tilray Inc. (Price to Sales ratio: 584.43)
Among the three contestants, Tilray is the least known. It recently got hiked to the peak of media attention, because the stock grew by 10X in the course of just one year, post its IPO in 2017, without any major growth in sales. As you can see, at 584.83X of its sales, this is one of the most expensive stocks you may ever encounter. While the opportunity to grow is large, most of the company's stock price gain is financially driven, not operationally. In other words, there has been insignificant business win, rather an announcement that a few hospitals in Australia are using the company's products. While the news is big in nature and indicates the possibility of pharmaceutical companies entering the market, there are no sales numbers to show the scale of the opportunity. Before the latest announcement, only 29 patients were using the company's products. And, the latest announcement does not offer any clarity into the scale of the agreement with the Australian hospital. Fueled by the news, and with very small number of shares available to be traded by the investors in the public market, the stock changed hands fast and furious (no pun intended). And, we ended up seeing double-digit price movement upward and downward in the course of the past few days.
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Who is our watchlist-worthy pick?
It's a hard one, because all three companies are extremely expensive. One of them is easy to eliminate though. Despite the potential growth opportunity that may come with Tilray if it signs a large-scale agreement with a medical or pharmaceutical company, at this point of the hype cycle, there is no solid evidence to justify investing in the company. No major improvement in the sales, combined with high-volume trading reminds us of another craze. Bitcoin at $20K, any one? With that, the battle is between Aurora and Canopy Growth. Canopy Growth is an interesting company. The growth of the company has not been reliant on the legalization of recreational marijuana. The company has made it clear that it only operates in the markets where legalization across all layers of government is in place. Additionally, a few strategic partnerships in the past few months has increased my confidence in this stock. The partnership with Constellation Brands for production of marijuana-infused beverages and distribution deals in Australia and Germany are a few key examples. Even without recreational marijuana legalization, the company is poised for growth within a growing market. On the other hand, Aurora has one of the lowest production cost per gram across its key competitors and the investments made in its upcoming Sky facility is expected to give Aurora Cannabis a much larger production capacity. Among the most significant players in the Canadian market, Aurora is the one that has built a stable distribution process to serve the Canadian market after the legalization. The potential agreement with Coca-Cola to produce a new wellness beverage is also an opportunity for opening up new revenue sources. [Hoda: I edited this sentence after the blog was posted, thanks to Scott T. - a member of our Intelligent Investors FB group - who rightfully reminded us that the agreement is not signed yet. That's called the power of having a community of smart investors around you. Thank you Scott!] Combine that with the lowest price to sales ratio, at this point, I'm adding Aurora Cannabis to my watchlist to monitor for a while and potentially pick up some shares in the upcoming months or quarters.
That's it for this edition of Stock Card Battles, the Cannabis edition. If you are a premium member, you can log in to see whether any of these companies exist in our premium portfolios. Make sure to write back to me, or share your thoughts and ideas with your fellow intelligent investors on our FB group, Twitter or anywhere else to access your Stock Card Weeklies.
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A shrinking map by the minutes, 100 or so soldiers mostly hiding but some fighting, and there shall only be one winner. That's called a Battle Royale mode and it is the latest video game craze. Remember, Candy Crush and PokemonGo? This is another one of those! The Fortnite game is the reason behind the battle royale craze of 2018. The game is developed by Epic Games. By some estimates, fueled by the success of Fortnite, Epic Games is now valued somewhere between $7 to $14 Billion. So far, it's just a craze, and nothing interesting for us, the stock market investors. Epic Games is a private company. But wait a minute! Tencent Holdings - the Chinese video game giant - owns 40% of the company. Clap your hands, 'cause things are getting interesting!
On today's edition of Stock Card Weekly, we are looking at three video game companies that are releasing a Battle Royale mode to see which one is worthy of a spot in our watchlist and ultimately finds its way into our long-term portfolios. Today's contestants are Tencent Holdings, Electronic Arts, and Activision Blizzard.
Note: All numbers stated are based on the last available data on 9/14/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Tencent Holdings (Price to Earnings ratio: 32.93)
Tencent Holdings is the gaming giant of China and world's biggest video game company, which also owns 40% stake in Epic Games, the developer of Fortnite. The company is a direct beneficiary of the Fortnite success. However, things are not going very well recently for Tencent. Seems like they have had some issues to sort out with game approval process that has caused the company to declare the first-ever quarter with a decline in their profit. This is of course a risk that comes with investing in the Chinese companies. We need to consider the risks that come with the impact of regulations and government ownership on the stock price fluctuations. Having said all that, Tencent is definitely a not-to-be-missed opportunity for risk-takers. It owns several successful game studios such as Riot Games and PUBG. Riot Games is one of the largest eSports game franchises in the world of "League of Legends". Tencent also is the publisher of PUBG (PlayerUnknown's Battlegrounds) which is the first game that created the Battle Royale craze. Among many other businesses, Tencent owns an instant messenger service called Tencent QQ and one of the largest web portals, QQ.com. It offers WeChat which is one of the world's most powerful apps. It also owns the majority of China's music services (through Tencent Music Entertainment), with more than 700 million active users and 120 million paying subscribers according to Wikipedia. At 32.93 price to earnings ratio, Tencent Holdings is a cheap bargain that comes with the a baggage of regulatory risk. In the Battle Royale of gaming stocks, it's hard to ignore this giant.
Visit Tencent Holdings' Stock Card.
$$ Electronic Arts (Price to Earnings ratio: 51.28)
Electronic Arts recently announced that it is delaying the release of its blockbuster video games title - Battlefield V - by four weeks. The delay is partially because the company plans to introduce the Battle Royale mode. Battlefield is one of the most popular first person shooter IPs that will include a Battle Royale mode as well. That makes this delay note-worthy. As muchs as the news is interesting for the player, the delay means there will be four fewer weeks in the current fiscal year to sell the game and that has got the analysts worried. For example, analysts at Merrill Lynch decided to reduce their estimated price target for EA for the next 12-18 months. While the concerns are valid, for long-term investors a few weeks of sales is a blip in the lifetime of a market leader such as EA. If you read through the managements' note, the delay in the release of the game is actually a strategic move. They postponed the game because of two reasons: 1) They have been receiving a lot of feedback from the gaming community about the recent monetization scheme which was introduced in a few of their games earlier this year. Such feedback is extremely valuable, and it is ingenious of the management to take the input and make sure they refine and polish their new game releases according to the feedback. 2) The change in the timing is expected to reduce the competitive pressure and put a time-gap between the release of the Battlefield game and other competitors such as Red Dead Redemption 2 by Take-Two Interactive and Call of Duty Black Ops 4 by Activision Blizzard which are also scheduled to be released around the original release date. As you can see on the EA's Stock Card, not only is the dip meaningful dragging the stock price to an undervalued range, but also the reasons behind the dip which are strategic, and we have the information to believe that there is no real change in the operational strength of the company.
Visit Electronic Arts' Stock Card.
$$$ Activision Blizzard (Price to Earnings ratio: 125.63)
While Fortnite was the talk of the town, Activision Blizzard was hard at work at their own battle Royale Game. What do you get when you smash the world's most famous first-person shooter IP, with the most crazed video game mode? You get Call of Duty, Battle Royale mode! (Duh!) Since the company released its open beta, the stock has been up close to 10%. The critics are raving about it and the video streamers are sharing their excitement all over. Many of the loyal Call of Duty fans, who were not sure whether they are going to buy the new release of the game scheduled for later in the year, now are counting down to the day they can get to download the full game and get to the battle. Beyond the Battle Royale mode, much like its rival Electronic Arts, the company is on track to benefit from the emergence of the eSports category and has already invested significantly in developing its eSport line of business. The investment includes the development of an eSport league, athlete drafting and recruitment rules and the development of the world's first eSport stadium for its popular Overwatch franchise. Activision Blizzard is a monster player in the video game industry.
Visit Activision Blizzard's Stock Card.
Who is our watchlist-worthy pick?
Which of these battle royale stocks is worthy of a spot in our intelligent investing watchlists? All three are well-managed companies in a strong market. It's hard to choose, to be honest. But, if watchlist is a place where we put the companies that are worth our attention and we wish to monitor for a while before jumping in, I have to say Tencent is my watchlist-worthy winner. Especially, at such a cheap price to earnings ratio, the company is worth considering. The other two are already strong companies and they already belong to most of the long-term portfolios out there. And, since we are focusing on Battle Royale mode, Tencent is clearly the note-worthy one. Not only do they own 40% of Epic Games - Fortnite, but also publish PUBG game, which is the first Battle Royale game created before Fortnite's success. The opportunity is just so big for the company in China to make money off of this new craze in the video game industry that it is undoubtedly the winner of today's Stock Card battle.
Hope you enjoyed this episode. If you are a premium member, log in to read about Stock Card team's final decision. If not, write back to me or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.
You or someone you know has the dibs!