- Constellation Brands (NYSE:STZ) (NYSE:STZ.B) takes CAD$245mln, 10% stake in marijuana grower Canopy Growth (CA:WEED) (OTC:TWMJF), validating this emerging industry.
- Fortune 500 companies are looking to participate, and they’re putting money to work in companies that are executing on their businesses with real revenue and growth potential.
- SLTK has been growing revenue consistently in this vertical, and with increased validation the stock is poised for huge upside to catch up to peers. P/S comparison suggests multiples of possible upside through price discovery.
Beverage supplier Constellation Brands (NYSE:STZ) (NYSE:STZ.B), the owner of Corona and one of the largest suppliers of alcoholic drinks in the U.S. and Canada, just took a tremendous CAD$245 mln (US$190 mln) stake in Canopy Growth Corp. (OTCMKTS:TWMJF) (CA:WEED) in order to own 9.9% of the company. This values Canopy Growth at over 61x their fiscal 2017 sales, and 38x this year’s estimated sales, an encouraging figure for other companies operating in this space.
But the investment goes far beyond just an interest in the company. Canopy Growth and Constellation will work intimately on consumer analytics, marketing and branding, as well as collaborate on the development and marketing of future cannabis-based beverages.
The biggest deal in cannabis in years demonstrates just how great the appetite is for this blossoming industry among larger companies. Investors have just begun to see the investments and partnerships that large companies will be inking in the next decade, which sets up quality companies that are executing on their businesses, like Solis Tek Inc (OTCMKTS:SLTK), for potentially big upside.
This is exceptional validation of this blossoming industry, but it’s not the first of its kind. We’ve seen Scotts Miracle-Gro (NYSE:SMG) make a concerted push into the marijuana space as well through its Hawthorne subsidiary, which is focused on hydroponics and similar growth mediums. The company has made consistent investments, totaling more than $200 mln in a few years, in the lighting, materials, and supplies that support cannabis growers like Canopy Growth Corp.
Clearly, large companies see the future of cannabis. Investors should be positioning the same way.
Why Canopy Growth And Why Now?
The answer is growth and quality execution. First and foremost the market opportunity is immense. Legal marijuana, for medicinal or recreational use, generated $7 billion in the U.S. in 2016. Analysts at Cowen and Company expect that to grow to $25 billion by 2020, and $50 billion by 2026. State laws are lining up in that direction with almost half of the country having legalized cannabis in one form or another as of fall 2017.
Second, Canopy Growth is executing well on their business plan and generating revenue, unlike many other small companies in the industry. Canopy brought in almost $40 million in revenue through the summer of this year, and the growth has been steady with improving gross margins. Canopy is steadily proving that they’re a real player and here to stay, and the large Constellation investment speaks to that.
Execution is key, and investors have noticed. TWMJF is up 160% in the last 12 months.
Or take Aurora Cannabis Inc. (OTC: ACBFF), for instance, which also trades on Toronto’s venture exchange and is another company focused on growing and selling medical marijuana. The stock delivered huge 312% gains in 2016 and has done an excellent job of monetizing their business in the last two years: Aurora delivered $18 million in sales so far in 2017.
Quiet SLTK Has Been Executing, Stock Ready to Explode Higher With Innovation
Solis Tek has been executing extremely well in this market, credited with some of the biggest innovations in the cannabis grow light space over the last 5 years and growing revenue. Grow lighting is an overlooked but HIGHLY lucrative space. The global cannabis grow light market is expected to reach $8.6 billion by 2025 according to Grand View Research.
Solis Tek’s digital ballast, for example, was designed with Ignition Control™ sequential lamp ignition and self-diagnostic safety systems to ensure everything is running smoothly and efficiently. That's resulted in some high-profile customers, including GB Sciences (OTCQB:GBLX), three-time US Cannabis Cup winner for Best Flowers Kyle Kushman, and Colin Gordon of Ethos Genetics.
In fact, a third party independent test of six lighting products serving the commercial cannabis sector conducted by Light Laboratory Inc confirmed that Solis Tek's digital lighting solutions scored highest in terms of overall value for cultivators. Grow lights are critical to facilitating the growth of healthier plants throughout the growth cycle. Some products are better not only because they enhance the growth capabilities, like SLTK's, but also because they can conserve energy when used correctly.
With nearly $2.5 million in sales last quarter alone, SLTK offers a rare pure-play opportunity in the cannabis industry. The company’s $10 million potential run-rate this year, with gross margins of 37%, are rare in this emerging industry. SLTK could be approaching profitability in the very near-term with the right sales growth, and the opportunity is a big one - Grand View Research expects a CAGR in the growth light space of 14%! And most recently, the company has diversified, launching a terpene-enhancing nutrient line called Terpenez, which uses all-natural ingredients to increase yield, lower cost, and grow healthier plants.
SLTK is rapidly creating a one-stop, top-quality provider for cannabis cultivators. And they're doing so without ever touching the plant, reducing the direct risk associated with federal law.
Finally, SLTK trades at a very conservative valuation based on our 2017 estimate of approximately $10 million in revenue, or a Price/Sales ratio of 4x. Compare that to the P/S of Canopy Growth, which has now reached 66x based on CAD$39.8 mln in their fiscal 2017. A move of even half this magnitude to trade in line with this peer would value SLTK at over $5.00, and we think a revaluing higher is not out of the question quickly with continued execution on the part of SLTK.
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