One of the most exciting verticals that is commonly associated with the cannabis sector is related to the opportunity that is surrounding cannabidiol (CBD) and other high-value cannabinoids. During the last year, we noticed an increase in the number of mainstream retailers carrying CBD products, and this is a trend that our readers need to be aware of.
From shopping centers to gas stations, from vitamin stores to supermarkets, we are impressed with the increase in the types of stores that are selling CBD infused products and are favorable on the distribution that is associated with it. Over the next year, we expect the CBD industry to report continued growth and this is an opportunity that we want to cover in-depth.
Although we are favorable on the increased interest in CBD products, the market has become saturated and there are currently more than 50 well-known brands in the US and the level of competition will only get more intense. From an operator standpoint, the increased competition has put significant pressure on the price of CBD, and this is a trend that is negatively impacting a majority of operators.
We are not surprised by the increased pressure on CBD companies and expect to see continued price compression of the cannabinoid. One way that companies are trying to fight against price compression is by focusing on additional high-value cannabinoids like cannabigerol (CBG) and cannabidivarin (CBDV). When compared to CBD, these cannabinoids have not been as impacted by price compression and have been a catalyst for the companies that are levered to them.
2020 is expected to be a period of sustained growth for the cannabis industry and we expect to see increased demand for cannabis infused products. Today, we want to highlight 3 businesses that are focused on the production of products that do not contain any tetrahydrocannabinol (THC), which has psychoactive properties and is the best-known cannabinoid. We believe that these businesses provide important insight when it comes to the breadth of the cannabis industry and will continue to monitor this vertical of it.
Charlotte’s Web: A CBD Leader to be Watching
Charlotte’s Web (CWEB.TO) is one of the best-known CBD businesses in the world and it provides a great barometer as it relates to the strength of the vertical. During the last few months, the business has been under pressure and sales have not been as strong as the previous quarters. This is a trend that we have seen across several leading CBD companies and is one that our readers need to be aware of.
If companies that are as strong as Charlotte’s Web are being impacted by price compression, then it is a trend that is most likely impacting businesses across the vertical. Because of this trend, we prefer companies that are focused on several high-value cannabinoids. Through this structure, the business will be better protected against price compression and we are focused on finding businesses with this type of structure.
During the last quarter, we have been closely following Charlotte’s Web and the recent trend has been to the downside. This decline comes after the company reported less significant quarterly revenues than expected and the market has not responded well to this. We are not surprised by the market’s response especially due to Charlotte’s Web’s valuation. It was the first CBD business to have a valuation that is above the $1 billion level and this represented a substantial accomplishment.
Although Charlotte’s Web has significant growth prospects, the market has high expectations for cannabis businesses with a greater than $1 billion valuation. Going forward, we believe that the business is well positioned for growth and are favorable on the amount of distribution that is already in place. From CVS to Walmart, you can find Charlotte’s Web products at retailers across the country and we will monitor how the management is able to diversify the business through the launch of new products.
Hemptown: A Pre-IPO Growth Story
When it comes to being protected against future price compression, we believe that Hemptown represents one of the most attractive opportunities. The company was an early mover on the CBG market and has been executing on a multi-faceted growth strategy. Over the next year, we expect Hemptown to record strong growth as it works to increase the number of acres it cultivates on and further differentiates its product offering from a type of cannabinoid standpoint.
Although Hemptown is focused on the CBD market, it has been working to increase the number of acres that are growing crops that are high in CBG. Currently, producers are generating almost 10x the amount of revenue per kilogram of CBG when compared to CBD and we find this to be significant. The difference in price has made the CBG more attractive to cultivators and we expect to see a larger focus on this cannabinoid in 2020. We expect the larger focus to cause price compression on CBG and will monitor how Hemptown positions itself for this.
One of the reasons we are excited about Hemptown is related to its strategy for growth. Through contract farming, the company has been able to significantly increase the number of acres it is cultivating on. Hemptown has been able to accomplish this feat for a fraction of the cost when compared to cultivators and we find this to be of importance.
In late 2019, we met with the Hemptown team at the MJ Biz Conference in Las Vegas and left the meeting feeling even more impressed with the operation. In the near future, the company plans to complete a go-public transaction and commence trading on the Canadian Stock Exchange (CSE). We believe that Hemptown represents a differentiated opportunity and an attractive play on the cannabinoid market. This is a listing that we are excited about and one that we will be closely following.
CV Sciences: Watching from the Sidelines
CV Sciences (CVSI) is the perfect example of a CBD company that has been impacted by price compression and increased competition. Last year, the company reported quarterly earnings that came in much lower than the prior quarter and this is a trend that is expected to continue in 2020 and beyond.
Last year, the market became overly obsessed with CV Sciences and the shares were trading above the $6.50 level at one point. During the last six-months, the CBD company has come well off its highs and the shares are trading below the $1 level. Although the valuation is much more attractive at current levels, we find the risk-reward profile to be too risky and will continue to monitor the opportunity from the sidelines.
Going forward, we believe that CV Sciences will continue to be impacted by the increased interest in the CBD sector. Although the company has substantial distribution at CVS Pharmacies across the US, the sales numbers have not been that impressive and this is something that our readers need to be aware of.
CV Sciences used to operate under the name CannaVest and it was one of the first publicly traded cannabis companies. Although the company is led by a management team that is well known in the cannabis industry, the recent trend has been to the downside and we are cautious at current levels. Going forward, we would like to see CV Sciences focus on other high-value cannabinoids and that would be a catalyst for growth.