The cannabis theme has started to spring back to life in recent weeks, with top traded names in the space up anywhere from 50-100% in the past two months in a move that has all the hallmarks of a new pot stock bull market trend starting to take root.
Given that many names have already run significantly higher in this initial burst, one primary object of analysis in front of us now will be the search for strong stories in the space that have yet to catch fire. One by one, these lesser known cannabis stocks will get found and driven higher. You can bank on that.
In that spirit, we wanted to take a close look at a stock that just may perfectly fit the bill as an excellent candidate for precisely just such a move: Sugarmade Inc (OTCMKTS:SGMD).
The key components we are looking for here are rapid revenue growth, deep value in terms of price-to-sales multiple on a forward sales basis, and an interesting thematic factor that suggests the stock may get popular on trading boards and chats once it starts to show some life.
SGMD has all the makings of a rising star along those lines.
Topline Growth and Value
Sugarmade Inc (OTCMKTS:SGMD) bills itself as a product and branding marketing company investing in operations and technologies with disruptive potential. The company’s portfolio includes CarryOutsupplies.com, SugarRush™ and Budcars.com.
Right now, the big story for the company is its BudCars business. It has two Sacramento hubs and just announced an imminent expansion into the LA regional market with its first LA hub set to ramp up in July.
The company’s primary locations in the Sacramento area have been experiencing dramatic growth, with revenues consistently increasing 10% week-over-week, driven by exploding demand for contactless delivery of cannabis products due to the coronavirus lockdown. The company now expects to surpass $30 million in annualized revenues at these locations.
“Our Sacramento locations will pass the $10 million mark for annualized sales within the next 60-90 days,” stated Jimmy Chan, CEO of Sugarmade. “The growth has been so dramatic that we have had to drastically revise our expectations to the upside, which demands expansion, both in terms of staff and fleet in Sacramento, and in terms of regional expansion into Southern California. As a result, we are acquiring two distribution hub locations in the LA area with cannabis licenses included so we can hit the ground running.”
That forms the context. But even ahead of the LA expansion, SGMD is seeing massive growth from BudCars on an organic basis. To wit: the company just announced record growth data during the month of April, with sales growing 58% on a sequential monthly basis over March sales on an average daily volume basis. In addition, data for the month of May already show a strong continuation of that trend, with May sales on pace to add another 16% over and above the strong breakout sales trend seen in April.
“We did about $6,000 per day in sales in March and over $9,500 per day in April, representing a very robust growth trend at our Sacramento hub,” notes Chan. “May is already off and running at better than $11,000 per day, demonstrating continued dramatic growth. And investors should also note that this $11,000 per day figure represents activity in only one area. With our LA hub set to come online at the start of summer, and with the unprecedented stay-at-home extension in that region, we believe our daily sales in the LA area could triple that figure relatively quickly.”
So, the growth is through the roof. But the stock is trading on a market cap of just $2.8 million. Hence, in forward terms, this thing is trading at well under 0.2x sales, which is unheard of the cannabis space. We typically see deep value cannabis multiples in the 1.5x-2.5x area, and most of them are more commonly above 8x. That would mean SGMD shares could rally 1000% and still seem underpriced relative to peers.
The Cannabis Delivery Theme is Budding
The growth in the delivery space for cannabis has been astonishing this year. And BudCars is a great example of that trend. Certainly, the pandemic lockdown has helped to drive that trend. But it only accelerated a movement that has been underway for a while.
Analysts now project cannabis delivery to top $10 billion in sales, making it perhaps the fastest growing sub-sector in this ramping overall theme.
As cannabis shortages fester in California and people worry about public spaces due to risks of infection, a cannabis delivery company with rock solid supplier relationships stands to benefit in a few ways.
According to the company, “Management notes that the California cannabis market is beginning to run into widespread shortages as demand surges over recent weeks. The Company wishes to assure shareholders that it has extremely strong supplier relationships and sees low risk of any issues in securing forward product inventories. Furthermore, as the Company’s competitors run into potential issues in securing their own inventory for distribution, management believes BudCars will likely see market share gains, providing another potential driver for near-term sales growth.”
In other words, this is a market share opportunity, which stands to double up the growth trend – the whole cannabis delivery theme is growing rapidly, and the lion’s share of that market is set to be eventually divided up between the leading brands, who may just be the services able to expand without a hiccup during this supply shortfall while stay-at-home demand soars.
SGMD is positioned to take advantage, especially since the company is getting ready to open multiple hubs in the Los Angeles market, which is the biggest single municipal market for cannabis sales on the planet – and expansion that the company expects to add a “conservative” $40 million on the top line on an annualized basis.