Acreage Holdings: Featured Cannabis Stock

Cultivation: 100,000 kgs in 1 million SF of production.

Distribution
Direct sales: N/A
Store networks: Acreage has retail stores called “The Botanist”, founded in 2018.

Acreage has operations in 20 states. They own licenses in 13 states, and in the remaining 7 states, they have operating agreements. In 6 “scalable” states, their operations generate revenue and positive EBITDA. In 3 “developing” states, they have revenue but do not yet have positive EBITDA. In the remaining 11 “emerging” states, they are not yet generating revenue.

In the 6 scalable states, they already have their allotted stores. In their 3 developing states, they can open 5 more stores. In their 11 emerging states, they have as many as 51 stores still to open, requiring substantial capital expenditures. If Canopy succeeds in buying Acreage, they will be able to spend from their large cash holdings to open these stores. Acreage also has wholesale operations in 14 states and can open up to 10 more.

Integration/Diversification:
Vertically integrated: Yes
Horizontally diversified: No

Acreage Holdings: Neutral Recommendation

Many cannabis companies were built from the ground up by cannabis entrepreneurs struggling in the trenches to learn to grow and produce cannabis.

Acreage Holdings is different. It was started by a Wall Street veteran, Kevin Murphy, and his High Street Partners investment firm. Kevin bought his way onto the Board of a cannabis company in Maine in 2011. From there he learned the investment side of the business and crafted a strategy to acquire a portfolio of cannabis businesses that controlled production and retail licenses in key states.

He now controls Acreage Holdings, a business with operations in 20 states, 300 employees, 26 operating dispensaries, a wholesale business, licenses to operate 85 dispensaries, and quite a few cultivation facilities, some operating and others under development. As an aggregator, not a builder, they are not focused on (and do not publish) how much cannabis they can or will produce.

Murphy’s strategy appears to have paid off handsomely, as Canopy Growth in April 2019 paid Acreage $300 million for the right to buy Acreage in the future when it is legal for Canopy to do. Canopy will then pay the rest, which will likely amount to over $3.5 billion. Canopy is currently forbidden to operate in the US, where cannabis is federally illegal, due to rules of the CSE exchange it trades on. Canopy wants to build its US business quickly, and thus wanted to buy a company with a lot of licenses. It has tons of cash to invest in opening the stores.

By itself (not counting the pending Canopy deal), Acreage has a lot of growth potential but is very highly-priced, with a Price to Sales ratio of 100. This is 20 times more than what we would expect it to be, when compared to a mature industry. With current annual revenue of about $50 million per year, we estimate that the stock is already priced for revenue of about $1 billion.

On this basis, we would not recommend it as a good investment, as it would take them a long time to reach that level.

The Canopy deal does improve its prospects. If Canopy stock maintains its current value, it will pay 25% more for Acreage than it is currently priced at. If Canopy shares climb, it will pay even more. But if Canopy shares decline, it will pay less, or even no premium at all.

Canopy’s confidence is compelling. But since we cannot know what Canopy will eventually pay for Acreage, we cannot say that the stock is a good value now.

Therefore, we recommend watching this stock, but not buying it. If investors can watch and time the development of the legal landscape that will permit Canopy to buy Acreage, AND Canopy’s stock has maintained its value or risen, then this will be a good stock to buy. Of course, the longer an investor waits to make that decision, the less premium will likely be available in the market, as other investors get in first.

Acreage Holdings: Featured Cannabis Stock