Cannabis producer Planet 13 Holdings (OTC:PLNH.F) has done a terrific job of dominating the Nevada market with its iconic SuperStore location, which is right by the Las Vegas Strip. But up until a few months ago, when it opened another location in Orange County, Calif., Nevada was its only state of operation. Now the company has plans for a couple more: Illinois and Florida.

The move into these key marijuana states will open up more growth opportunities for Planet 13, making the company less dependent on just Nevada. But the expansion comes with challenges, and there's no guarantee that the company's large SuperStore locations will do well in other markets. Do Planet 13's moves into these additional states make it a better buy, or should they be a cause for concern among investors?

A farmer examining a cannabis plant.

Image source: Getty Images.

These markets could have more potential than Nevada

In August, Planet 13 announced that it had won a dispensary license to operate in the Chicago area. Co-CEO Larry Scheffler said that "Chicago has been one of the main target markets for a Planet 13 SuperStore, with its rapidly growing cannabis sales, large population base, and attraction as a tourist destination." This month, Planet 13 also announced that it will enter Florida by acquiring a medical marijuana license for $55 million from Harvest Health & Recreation. Scheffler says Florida "has long been one of our most coveted markets."  Both Florida and Illinois are less saturated markets than Nevada, and expansion in either or both places could make it easy for Planet 13 to rapidly grow its sales.

In Nevada, there are approximately 2.4 dispensaries per 100,000 people, making it one of the more competitive marijuana markets in the country. California, where Planet 13 recently launched a new dispensary, has a lower rate at 1.6. Even with larger marijuana producers Curaleaf Holdings and Trulieve Cannabis currently dominating the Florida market, the state is big enough to support more competition -- its dispensary rate per capita is less than half of Nevada's, at just 1.1. In Illinois, the number is even lower. However, Illinois is also in the process of distributing 185 new licenses to sell pot -- including oneto Planet 13. That figure is more than double the 110 dispensaries the state has right now.

But even with a rising number of dispensaries, Illinois will probably still be a less saturated market than Nevada, at least for the time being. And although it's so far secured just one license in Chicago, as Planet 13 has shown with its SuperStore location in Las Vegas, one strategically located and well-developed dispensary can be enough to bring in a significant amount of revenue for its business.

A report from Leafly earlier this year identified both Florida and Illinois as being among the top 10 cannabis states in terms of jobs and revenue. California topped the list, but Nevada didn't make the cut.

Are Planet 13's plans too big?

Normally, a company's expansion into new states doesn't raise too many eyebrows. But Planet 13 doesn't do things small. Its SuperStore in Las Vegas is 112,000 square feet. Construction company Grow America Builders estimates that the average cannabis dispensary is no larger than 5,000 square feet, less than 5% the size of the Las Vegas SuperStore. In Orange County, Planet 13 has opened a smaller location, but at 55,000 square feet, it's still the state's largest dispensary. In Florida, the company is planning to launch its large SuperStore locations in multiple tourist locations, including Miami, Orlando, and potentially other cities. No word yet on how big those stores will be. Although the company hasn't formally announced plans for what its Chicago location might look like, that dispensary isn't likely to be small, either.

The danger with going too big is that the costs of operation will be much larger than with a smaller location, and there will be more pressure for that one location to perform. The model of a large location may work in Las Vegas, where the Strip is going to attract the bulk of the city's traffic and tourists are going to be looking for big attractions -- but whether that will work in Orange County, Chicago, Miami, or Orlando is uncertain.

Financially, the company looks to be in good shape to fund these growth opportunities. On Aug. 26, when Planet 13 reported its latest quarterly results for the period ending June 30, it had more than $130 million cash on its books -- easily enough to cover its operating cash burn, which has totaled just $2 million over the past 12 months. 

Do these moves make Planet 13 a better buy?

There are some great opportunities ahead for Planet 13, and expanding into more states will certainly make it less dependent on Nevada. However, given the risk involved in these ventures, the pot stock should be trading at a discount. However, investors are currently paying a price-to-sales multiple of close to 9 for Planet 13's stock -- well above what some larger multistate operators are trading at: 

PLNHF PS Ratio Chart

PLNHF PS Ratio data by YCharts

As a result of this higher valuation, I would avoid Planet 13's stock for the time being. Until it can prove that its large dispensary model works in locations outside Nevada, investors are better off waiting to see how this strategy is working for the company. Although its shares have fallen more than 30% in the past three months (the Horizons Marijuana Life Sciences ETF is down just 23% during this period), it wouldn't be surprising to see Planet 13's stock fall even further before the year comes to a close, given its inflated price and the recent bearishness in the sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.