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High Tide: Strong Growth Suggests Undervaluation
Mar. 17, 2021
Seeking Alpha
By Main Street Investor
While the Canadian cannabis producer jumped 300% from its initial IPO price in November, I believe the company continues to trade at a discount.
The legal cannabis market is gigantic and growing quickly; High tide is simultaneously seeing strong revenue growth.
High Tide has a chance to multiply many times from current levels, considering valuations of peers and levels reached in 2018.
Various risks remain, including high competition, low liquidity, and slower than expected adaptation of cannabis.
Overview
*All financial numbers in this article are denominated in Canadian Dollars, unless otherwise specified. USD prefixes to any US$ amounts in the article.
High Tide (OTCQB:HITIF) is a relatively new cannabis producer and distributor that held its IPO on the Canadian stock exchange in November 2020. After Canada announced the legalization of Cannabis in 2018, it became the second large nation that completely allows the possession of Marijuana following Uruguay in 2013. As a result, marijuana producers saw shares surge by hundreds and even thousands of percent in a short period of time.
The legalization served as a benchmark for further legalization in other countries, putting pressure on other democracies around the world. Here, various states in the United States began to legalize pot, including California, New York, New Jersey, and Vermont. The wave of cannabis legalization is swapping across other continents too, as Europe increasingly adopts marijuana for medical use.
The penny stock quickly jumped, now trading 300% higher than when it first hit public markets. While the company is currently under the radar of many cannabis investors due to its low share price and only accessible through the Canadian stock exchange or over-the-counter markets, the company has submitted an application to list on Nasdaq, which would benefit the company offering wider exposure to more investors. The application could be successful, considering that High Tide fulfills most of NASDAQ's listing requirements, yet it might need to do a reverse stock split in order to reach a minimum of $3 per share.
Strong Growth
High Tide reported blockbuster Q4 earnings, as revenue jumped 118% to $24.9 million in the quarter and a staggering 166% to $83.3 million for the entire fiscal year 2020. The company also announced gross margins of 35% for the quarter and 37% for the fiscal year. Geographically, $68.4 million was generated in Canada, while $14.3 million (17%) came from the United States. Furthermore, the company's cash balance increased to $38 million.
Despite the global slump in retail sales associated with the pandemic, and thanks to the tireless efforts of our team, we closed the year with approximately $8 million in Adjusted EBITDA making 2020 the best year in High Tide's history. We continued to run our operations tightly, ending the year off with the record levels of revenue and Adjusted EBITDA. Our integrated value chain which includes Cannabis Bricks & Mortar stores, e-commerce platforms for consumption accessories and hemp-derived CBD products, along with manufacturing and distribution of licensed and proprietary consumption accessories, experienced sizeable growth on all fronts. - CEO Raj Grover
High Tide Revenue
The strong growth is expected to continue well into 2021, as the company expects Q1 revenue of $38 million, representing top-line growth of 355% YOY. For FY 2021, consensus estimates are calling for roughly $186 million in revenue, further growing to $268 million by 2022.
The Cannabis Market is Huge
The legal cannabis market for medical and recreation use is gigantic and growing quickly. In the North American market alone, which is High Tide's main operational market, the cannabis market should reach a staggering $38 billion by 2024 if current trends continue. As of 2019, the continent held the largest global share with 88%, which will drop as other continents are increasingly legalizing recreational cannabis use.
The global legal marijuana market size is expected to reach USD 73.6 billion by 2027, according to a new report published by Grand View Research, Inc. It is anticipated to expand at a CAGR of 18.1% during the forecast period. The increasing legalization of cannabis for medical as well as adult-use is expected to promote growth. - Grand View Research
On a basis type, the medical segment accounts for the largest share of 71% with wide applications to treat severe medical conditions such as Alzheimer's, cancer, arthritis, and Parkinson's disease. Moreover, it can reduce chronic pain, mental disorders and anxieties, a gigantic market opportunity when fully adapted as a medicine.
However, what gets Investors most excited is the opportunity of Cannabis as a recreational drug, similar to Alcohol. This would outstrip the medical segment by a wide margin if legalized. Recent statistics reveal that at least 94.5 million Americans admitted to trying cannabis at least once in their lifetimes, representing 30% of the entire population. If Cannabis was legal that figure would likely be even greater.
Cheap Valuation
High Tide is among the cheapest cannabis stocks on the market, despite rallying over 300% from its lows of just $0.17. Here, High Tide trades at 2.4 times forward EV to Sales, significantly lower than major peers including Aphria (NASDAQ:APHA), Cronos (NASDAQ:CRON), Canopy (NYSE:CGC), and Tilray (NASDAQ:TLRY). Moreover, High Tide is growing the quickest from the list and has comparable gross margins of around 40%. What's striking is that High Tide is trading at just 1.3x projected sales in 2022, whereas peers are trading at around 10 times that figure.
I also want to point out that the Cannabis market is nowhere near valuations reached in 2018. Stocks such as Tilray and Aurora (NYSE:ACB) were trading at above 100 times revenue, though valuations dropped significantly in the following years. Still, there is nothing holding back the market to spike again, as seen in early February when Cannabis stocks jumped by a few hundred percent. Thus, a valuation of at least 20x sales does not seem absurd for High Tide to reach at least for a short period of time. If that happens, High Tide could triple or more from current levels. I thus believe, there is significantly more upside to High Tide than downside. As pointed out before, if High Tide lists on the Nasdaq and the stock become visible to more investors, shares could skyrocket.
Risks
Although I believe High Tide is an attractive investment, various risks remain. The cannabis market is exciting to investors as it offers high growth, with the hope of being widely adopted as a medicine to treat health conditions and disrupting the recreational drug market in North America. While the current situation is developing positively with more states legalizing cannabis, as a result of the presidential election, it is unclear how fast cannabis will be fully adopted across society. For instance, it is argued that when cannabis will be legalized overall consumption will drop significantly as the 'thrill' disappears. Prices of cannabis will also drop significantly, as the value chain is practically eliminated. As a result, overall margins should decrease and competition will increase drastically.
High Tide could drop back to below $0.10 if the company sees slower than expected growth and if its Nasdaq listing application is rejected. Moreover, if retail interest for the stock decreases, shares could plunge additionally. Also, the stock benefitted from an overall bull market in Cannabis stocks, yet in a bear market shares will likely underperform the broader market due to high volatility.
Takeaways
High Tide is an underrated penny stock that benefits from the enormous growth in the North American cannabis industry, reflected in its quarterly earnings. The stock may not stay a penny stock for long: Share surged from just $0.17 to $1 in a matter of months, before dropping back to $0.68. What matters most, however, are extremely attractive fundamentals. The company's sales and are surging, a trend that is unlikely to reverse anytime soon. At the same time, High Tide is trading well below its peers, and another spike in the overall cannabis market similar to 2018 could cause High Tide to multiply many times from current levels. Despite the rosy fundamentals, small risks remain as competition will increase and High Tide's liquidity is still somewhat low, standing at $38 million.
03/23/21 9:53 AM
AI
