Post by
PUNJABI on Mar 18, 2021 6:40pm
Processors many never get the same vaulations as producers.
Wrote this post for VLNS. LABS is in the same situation. I think this company will be taken out by a big company in the sector who want to have their own manufacturing units. Some large companies are loaded with cash. It could all cash / shares or a combination of cash and shares. If this happens then long-term shares holders will higher average cost will never recover their money.
The producers are trading way ahead of their valuations. Most of them are burning cash printing new shares to cover their massive losses yet they are worth billions of dollars. Clearly, the whole sector is way ahead of its fundamentals. It can further inflate provided the air does not come out of Nasdaq and growth stocks.
This sector is all hype, speculation, and momentum which has created a big bubble in anticipation that the earning will catch up as markets expand. It is about market shares and become the leader at this time. Canopy took a $750m term loan. They cannot have serious organic growth so they will be taking out other companies. They will be overpaying and then writing off the purchase.
One should know the risks involved and make informed decisions. This sector is a momentum trade and not a value investment. Big money can be made and lost.
A lot of fancy accounting and terms are being used with inventory, no one will share price per gram. Oil, copper, and other commodity producers will give their cost of production. There is little growth and the trend in the industry is targeting positive EBITDA and not net profit because it is not achievable in the near future. ( year or two ) e.g Hexo couldn't even achieve positive EBITDA so they came out with adjusted EBITDA. Hexo lost $20 & VLNS. $16.6 m. The emphasis on gross profits and positive adjusted EBITDA can be misleading for the retail investors that do not understand the balance sheet.
Retail investors need to focus on the cash that companies are burning every year. Massive burn rates mean one thing only, more dilution. When they end up with billion shares they will do a reverse split and long-term shares holders will get destroyed and may never have a chance to recover their investment.
Next profits and positive cash flow are very rare in the sector. So this sector is all speculation and momentum play and not based on fundamentals.
This is a growth sector and tracks Nasdaq. If the Nasdaq corrects because of inflation fears and rising 10 yrs bond yields then most likely this sector will correct too. But this sector has other dynamics too like legalization and the opening of massive markets. With inflation, the revenues of the companies will increase. Have no idea if or when this sector will separate from Nasdaq.
Feds have tried to assure the markets that there is no risk of interest increase in a year or two but markets are reacting to bond yields. Time will tell if investors would ignore increasing bond yields. Todays across board selloff was a result of 10 yr bond yields trading over 1.74 %
It seems that the market is evaluating producers and processors differently, look at market valuations of VLNS, LABS, NEPT etc, and the producers. I think VLNS has the best balance sheets among this group.
Maybe the logic for lower valuations is that all the big producers will have their own in-house units for transformation and making products. The existing factories/producers will be left with small customers that cannot afford their own facilities. LABS had a huge drop in their quarter. VLNS Revenue for Q4 was only $16m as compared $18m in the Q3. The revenue of NEPT also collapsed.
Comment by
alleyesonme on Mar 19, 2021 10:37am
Who knows!?!? There's the possibility discussions could be taking place as we speak. Perhaps that's why they haven't bothered bringing on a new CEO. Labs is ripe for the picking at such a low valuation. Many company's willing to take advantage and what a deal even at 500 million!