What’s the best performing pot stock in the market right now? There’s a good chance that the answer is much more interesting than you might think: Sugarmade Inc (OTCMKTS:SGMD) is a small California cannabis player that has seen shares ramp nearly 325% in the past 10 days on increasing evidence that the company has found a fresh model with major implications for growth on both the top and bottom line.
The cannabis space is maturing a bit in the market. 7-8 years ago, the bar was set at “existing” and “having a pot leaf in your logo”. Now, after a vicious two-year bear market that has sent a good third of the industry packing in one form or another, the bar is much higher, and profitability and long-term viability are finally on the table.
But that’s not to say Growth isn’t still job number one.
Sugarmade is hitting on all of these cylinders right now from what we can see. The company is mostly “about” it’s BudCars segment – a red hot cannabis delivery service based in the Sacramento area.
SGMD took a controlling stake in BudCars at the start of the year, and Sugarmade management has been working the buttons and levers ever since, pushing hard the gas pedal. And it’s working: BudCars has seen steady and somewhat astronomical topline growth in recent months, ramping sales by over 10% on a sequential weekly basis.
But the topline isn’t what has the stock ramping right now.
Not “Uber Smokes”
One interesting feature of investing in the age of the coronavirus is the gradual realization by the investing community that delivery companies don’t really make any money. This has come to light with further probes into Softbank and the failed Grubhub/Uber deal. The idea of abstracting the delivery part of the equation out and making a specialist service that handles just that part of the model when food (or weed) is purchased for delivery is a terrible idea. That’s the least profitable part of the delivered consumables model.
It’s the part that a pizza company has to reluctantly do because its competition does. It’s not the part that you do because it delivers cash from operations to the bottomline for shareholders.
Sugarmade has recently put out a series of releases to make sure market participants know that BudCars is more like Domino’s Pizza (DPZ) than Grubhub (GRUB). Domino’s makes lots of money. Grubhub doesn’t.
SGMD just put out a release noting that it has been seeing record growth in gross profits and gross profit margins for BudCars sales during the month of May (up 46% on a sequential month-over-month basis), and continued strong signals so far during the first half of June, with gross profits growing 9.9% on a week-over-week basis.
“As we gear up to open our first new hub in the Los Angeles regional market, we continue to see very good signs from our Sacramento hub, with the very rapid topline growth clearly translating to the bottom line as margins hold up and even improve,” commented Jimmy Chan, CEO of Sugarmade. “As we recently reiterated, BudCars is not a delivery business comparable to GrubHub or Uber Eats. It is a top cannabis retail business with very consistent 46-52% gross margins on a wholesale inventory with very secure logistical underpinnings. This differentiation has been a source of misunderstanding, and it is critical to fully appreciating our value proposition and our strategy as a Company moving forward.”
Up, Up and Away
Sugarmade Inc (OTCMKTS:SGMD) is actually now moving to take that profitability factor even further, seeking to verticalize operations for BudCars by cultivating some of its own end-market product volume, which will likely add significantly to margins by dropping the total cost of goods sold.
To achieve this, the company announced earlier this week that it is submitting an application to the California Bureau of Cannabis Control to expand into cannabis cultivation as part of a strategic plan to partially verticalize its BudCars model. According to that most recent release, the company has already secured a property containing a 5,000 square-foot indoor premium cannabis cultivation facility located in very close proximity to its Sacramento BudCars hub.
On the move, Chan noted, “BudCars is a high margin, high-growth business. But it will still benefit from verticalization. Because we have access to our end-market consumer directly and we have cultivation expertise and a premium grow facility, an expansion into cultivation to connect the dots is a clearly advantageous move. In addition, because BudCars is a rapidly growing distribution channel, we will have a clear edge in the marketplace in terms of the capacity to establish our own branded cannabis product line.”