The stock of Medbox Inc. (MDBX.PK) received an enormous boost subsequent to the publishing of an article on Marketwatch that proposed ways to invest in the growing legalized Marijuana Industry. The 3000% boost in price was followed by the management sharing concerns with regards to the hike and downplaying the excitement of the investors. We are of the view that although the legalization of marijuana presents an opportunity for Medbox, it does not solely rely on the drug for the sale of its equipments. Below we present the case for how the news was misinterpreted by the market and what the company expects for itself in the future.
Medbox is in the business of offering machines that dispense medicines and merchandise based on biometric identification (fingerprint identification). In doing so, it allows hospitals, doctor's offices and pharmacies to manage their employees' possession of potentially harmful drugs. The systems are programmed to only 1) allow access to the drugs to registered patients and 2) to make sure that the patient has valid authorization from a physician to possess and use the medicines dispensed. The company has offices in New York, Tokyo and Toronto and is headquartered in Los Angeles.
The article on Marketwatch presented interesting facts relating to the medical use of marijuana such as the total market size for its medicinal usage, which is estimated at $1.7 billion. Although federal law still prohibits the use of the drug, it is worth noting that over 18 states, including Washington, have legalized the drug's usage for people suffering from ailments such as cancer, HIV/AIDS, multiple sclerosis and epilepsy. Medbox already has an installed capacity of 130 units with an additional 40 units expected to be installed in the coming quarter. The vending machines dispense set doses of the drug and can be used in ordinary drug stores as well. However, marijuana is not the only drug that the machine dispenses, a fact which has been overlooked by the media. Its primary purpose remains to maintain inventory control and accountability for employees of hospitals, pharmacies, and so on, in dispensing medicine to consumers.
Although the company stands to benefit from its own product line, the stock price increase to $225 was not justified. Moreover, the fact that federal law still considers the drug to be illegal, investments in companies related to the drug carry enormous risks.
We have noticed that several websites have highlighted the recent initiative in Washington and Colorado to allow pot for recreational purposes as a positive for Medbox. The truth is that the company will remain focused on dispensing marijuana for medicinal use only, so the hype created around the aforementioned news seems too far-fetched and not based on solid reasoning. However, it must be noted that through the legalizing of marijuana for medical use in over 18 states, the number of Americans who have access to marijuana would be increased to 100 million.
Financials and Future Plans
Since its launch in 2010, the company has generated roughly $8 million in revenue. The information released for the third quarter, ending September 2012, revealed a revenue figure of $1.3 million with total revenue from operations for the full fiscal year expected to be over $5 million. The last quarter also saw an increase in the shareholder base of the company by 30%, with potential dividend programs for its shareholders to be announced in the coming months.
It was also announced that the company will spin off a new division called Medbox RX that will focus entirely on the pharmaceutical sector. The division will offer storage and retrieval systems, along with dispensers, to pharmacies, prisons, hospitals, and so on. Three new units are being developed that will be marketed exclusively by Medbox RX and will employ Medbox's proprietary software and patented biometric fingerprint recognition technologies.
Although the company has grown since its inception, with solid revenue growth and an interesting new lineup of products, the surge in price that the market witnessed was not justified as it was based solely on hearsay and extremely optimistic estimates. Having said that, it came as no surprise that the management was quick to downplay the excitement in the market and stated that although the company was doing well, the price hike does not reflect the economics of their business. The surge in the price sent the total market cap of the company to a whopping $2.27 billion. Before the surge in price, the stock was trading below $10 dollars, and even traded in the range of $2.75 - $3.45 for a long time.
Projections provided by the company reveal that it expects a compound revenue growth of 76% per year through 2016 with top sales of over $48 million in the year 2016. Applying a sector average P/S multiple of 0.96 with peak sales of $48 million, we estimate a price target of $4.5 for the company. Using Medbox's products, healthcare companies (hospitals) can reduce costs by effective inventory management, and through tracking medicines. Furthermore, the medicinal Marijuana Industry is expanding, with several states giving the go ahead to its use. Investors who wish to play the market should probably wait for the stock to be reasonably priced and then take a position for the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.