WM Technology (MAPS 0.69%), which owns Weedmaps, is one of the cannabis industry's hot new stocks this year. The Weedmaps platform helps people find the nearest pot shop and it makes it easy for marijuana businesses to advertise. And since the business is not plant-touching, the stock is able to trade on a major exchange: the Nasdaq.
At a $1.7 billion market cap, it is already bigger than popular meme stock Sundial Growers, which has a valuation of less than $1.5 billion. But unlike the Canada-based cannabis company, WM gives investors the opportunity to benefit from the industry's growth in the U.S. and around the world -- Weedmaps has listings in several countries. And there are a couple of other exciting reasons that could make this one of the more attractive buys in the industry right now.
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Sales are through the roof
Weedmaps helps companies promote their businesses online and makes money through listings on its app and website. Users can browse for what's nearby and filter by which products they are looking for. It also has a deals section and helps users find shops that offer delivery and pickup. So it's easy to see why the company's top line would be soaring as marijuana legalization progresses in the U.S. and around the world.
According to an investor presentation from December 2020, WM revenue grew from just $43 million in 2015 to $144 million in 2019. The company has been growing at a compound annual rate of 40%. And there's still more growth on the way. WM projected that for 2020 its revenue would hit $160 million and by 2023 it anticipates that its top line will hit $440 million -- close to triple that value. And with the possibility of more states legalizing marijuana and more pot shops popping up, there's potential for those numbers to come in even higher than that. As of September 2020, the company's monthly average users totaled 10 million -- up from 6 million at the beginning of the year. And its monthly revenue per client was also higher: $3,600 versus $2,600.
The company looks like a safe bet to post a profit as it grows
What I like most about WM is its incredible gross margin -- the percentage of revenue it has left over after deducting cost of goods sold. That margin is typically 95% of revenue, leaving plenty of room for the business to post a profit after its operating expenses and fixed costs. As of the end of September 2020, the company's year-to-date profit totaled $29 million and adjusted EBITDA was $32 million -- more than 27% of its top line.
WM projects that its EBITDA margin will rise over the next few years and that by 2023, it will total $130 million -- close to four times the $35 million it expected to report as of the end of 2020.
How does its valuation compare against other pot stocks?
If WM hits the $205 million that it is anticipating in 2021, that would put the company's forward price-to-sales (P/S) multiple at eight. It's hard to compare WM against other pot stocks since its business is fairly unique in the sector. Other pick-and-shovel cannabis investments Innovative Industrial Properties and GrowGeneration trade at forward P/S multiples of 24 and five, respectively. That's a broad range and that can make it difficult to evaluate WM. Both of those companies are profitable and have been generating strong growth numbers.
Should you invest in WM Technology?
WM gives investors a great opportunity to diversify within the cannabis sector. But one reason I would avoid the stock, for now, is the legal uncertainty surrounding it. In March, MarketWatch reported that federal prosecutors were looking into companies associated with Weedmaps and also requested information related to its business. A few years ago, Weedmaps got into hot water with regulators after allowing illegal pot shops to advertise on its website. Although this doesn't mean Weedmaps is in trouble (or that this new probe is related to its previous problems) it definitely adds some risk to this investment. At the very least, the stock should command a smaller premium (compared to other pick-and-shovel plays).
Since WM Technology officially formed and the combination with Silver Spike Acquisition closed on June 16, its shares have fallen more than 35% (the Horizons Marijuana Life Sciences ETF has declined by only 11%). Although the company's growth rate and margins look good, other pick-and-shovel investments could be better options right now. Investors should keep WM on their watch list but this isn't a stock I'd rush out to buy at its current price tag.
