$3.5 billion Curaleaf (CURLF) came on the scene via a merge of two separate companies. The two companies combined, renamed themselves and did an IPO all at once. However, the IPO came out when the pot stock scene, along with the rest of the world’s financial markets, were selling off sharply. Curaleaf’s IPO debuted at $10.00. It has never printed that price; on its first day of trading the stock traded down some 34%:
As I mentioned, the entire stock market was selling simultaneous to the Curaleaf IPO. Here is a chart on the MJ Alternative Investment ETF to show how similar Curaleaf’s fortunes were to the entire cannabis industry:
Previous to the IPO, the fortunes of pot stocks were moving sharply higher and attracting the attention of many onlookers wanting to get in on the action. Prices rose disproportionate to what these companies could actually create in revenue and turn into profits. Eventually, there was a shakeup in the pot stock scene and all stocks came crashing down.
Since that time, Curaleaf has recovered its best prices since its debut but has yet to regain it pre-IPO initial price of $10.00. The stock is getting closer. Now, it begs to question, is there truly value there?
Is Curaleaf A Good Buy?
Predominantly, Curaleaf is a retail operation and the copay hopes to generate some $400 million in revenue this year alone. The company is hoping to expand their operations across a multitude of states to take advantage of the momentum in the cannabis industry. Curaleaf wants retail operations in as many states as possible. But, this is where I start to have problems with the company. While more retail stores may generate more top-line revenue it does not necessarily mean more profits on the bottom line.
Curaleaf expects to not only earn the $400 million in revenue but also $100 million of free cash flow from that revenue; 25% of the revenue generated in top-line profits. What strikes me as a challenge is the fact that Curaleaf already has multiple locations they are operating. The company has lost some $40 million for the first 9 months of 2018. And, the company also hops to have 40 of the 67 stores operational by the end of calendar year 2018.
I am quite leery of the companies projections with its retail stores. Companies do not simply open their doors and voilá, there is a line of customers to serve that will push these dispensaries towards profitability. I believe that it may be possible for Curaleaf to reach its $400 million in operational revenue. However, a 25% profit margin on that revenue in the first year seems a bit too ambitious for my thinking. I believe that Curaleaf may be expecting too much.
There may, in fact, be an opportunity with this company and that is to short the stock. If Curaleaf begins missing their numbers then the stock could plummet. I will be keeping a keen eye on the developments of new store openings. But, my firm belief is that the company will miss its mark.
Author’s Disclosure: I have no open trades on this stock nor intend on opening new positions in the very near future.
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