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Summary

  • PHOT's earnings release, yesterday, confirms expectations of rapid revenue growth from acquisitions, which soared 235% to $4.85 million for fiscal 2013, compared with $1.45 million posted for fiscal 2012.
  • The cannabis market in the U.S. is estimated to reach between $35 billion and $100 billion per annum, with some suggesting that the latter is much more likely.
  • When the legal and legislative obstacles are removed, Wall Street's traditional financing methods will seek the best-in-breed.

Most investors who read SA clearly remember the dotcom revolution of the 1990s, the subsequent bubble of 1997-1999 and its pop in the spring of 2000.

Back then, traditional metrics of stock valuations, such as P/E ratio were summarily dismissed over time by many Wall Street professionals charged with covering the dotcom stocks. Instead, the number of "eyeballs" metric (website page views) replaced Gross Margin and Net Profit as the means of "valuing" dotcom stocks.

Back in those days, not many truly sensed that the biggest bubble in American history was on its way to a colossal pop.

In particular, one of the stocks of most keen fascination and frenzy among speculators during the dotcom boom-to-bubble-to-bust spectacle was Amazon.com (NASDAQ:AMZN), a stock, of which, a scarcely-known analyst at CIBC Oppenheimer, Henry Blodget, couldn't recommend enough.

While bigger-name broker-dealers were warning investors of the exorbitantly rich valuation of AMZN, Blodget continued to raise his price targets for the online book retailer. At near-peak of the madness, in Dec. 1998, Blodget had raised his price target of AMZN to $400 per share, which calculated to an eye-popping $60 billion market cap for a company that had already been hemorrhaging cash and diluting shares since its IPO of May 1997.

In early Jan. 1999, three weeks later, Blodget's target of $400 was realized (peaking on Jan. 11 at $555, adjusting for a 3:1 stock split), cementing his place as an analyst to remember, a Wall Street star, if you will.

In Mar. 1999, AMZN reported a record annual loss for fiscal 1998 of $124.5 million on sales of $609 million. Amazingly, investors were willing to pay as high as $555 per share (98-times sales) for a company slated to lose $124.5 million.

In 2000, AMZN posted another record loss of, this time, an eye-popping $720 million. But by then, the Nasdaq pop was underway. At the post-bubble low of Oct. 2001 (following the 9-11 attack), AMZN traded at approximately $35, for a whopping 93.5% loss from its Jan. 1999 high.

AMZN went on to lose another $1.41 billion in 2000; $567 million in 2001; and $149 million in 2002, before reaching a small profit of $35.2 million for fiscal 2003.

So, six years after the IPO, AMZN turned a tiny profit. It, then, took another seven years for AMZN to report positive retained earnings.

Today, AMZN trades at a $154 billion valuation, and posts revenue of $74 billion per annum.

So, fifteen years later, even those investors foolish enough to buy Amazon at $555 per share (after a total of a 6:1 stock split) made a compound return of 6.5%, excluding dividends, compared to the Dow Jones Industrial Average CAGR of 2.6%, excluding dividends.

Okay, after taking the long-winded, but necessary trip down memory lane of the AMZN story, here's our germane point about Growlife, Inc. (OTC:PHOT).

Like AMZN of 1997, PHOT, in 2014, trades in an environment of a potentially explosive market size in the coming years.

The cannabis market in the U.S. is estimated to reach between $35 billion and $100 billion per annum, with some suggesting that the latter is much more likely, given the total money spent on alcohol ($188 billion) and cigarettes ($75 billion) reached $263 billion in 2008. That, of course, is predicated on all, or most, states legalizing cannabis in the coming years, which appears at the moment to be likely.

But unlike AMZN, PHOT cannot raise capital from traditional sources, and doesn't enjoy institutional sponsorship due to the regulatory nature of the cannabis industry.

In one sense, PHOT is handicapped with the cut-off of traditional capital sources. However, because of that impediment, ironically, PHOT enjoys a temporary and meaningful moat to entry. Competition that has not sprung up from Wall Street's deep pockets and big tobacco's abstention provides PHOT with a head start in the race for market share. Instead, the company has received private placement funding for acquisitions of $40 million from CANX USA LLC, a private entity committed to the space.

And what we feel is the most compelling argument for PHOT's potential for meaningful success is its management. The CEO, Sterling Scott, 58, has approximately 30 years of management experience, compared with Jeff Bezos's age of 33 years at the time of AMZN's IPO.

In all, the average age of PHOT's senior executives and board members is more than 52-years old (page 72), with one executive, Marco Hegyi, who brings to the table executive experience from Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT), as well as another executive who has an impressive list of successfully engaging the state and federal governments in criminal matters involving cannabis. In contrast, the average age of AMZN executives was under 40-years old.

We would like to remind readers of that critical point from our previous article of Feb. 11, entitled, "Growlife: Why There is No Stock Like It", the following quote from the Denver Post and the editor of Medical Marijuana Business Daily:

"[M]aking it in the legal pot industry today is as much about business acumen as it is about growing good weed," stated the Denver Post.

"You will find that the successful ones are professionals," Chris Walsh, editor of Medical Marijuana Business Daily, told the Post. "They'll wear a suit to a meeting. They understand their company's books and finances. ... These guys picked up pretty quickly that you've got to be professional in this."

And finally, the most interesting comparison we can make at this time. On the Amazon website (where else?) is a book available for sale, entitled, "amazon.com - Get Big Fast : Inside the Revolutionary Business Model That Changed the World." The theme of the book, from our understanding, centers on the strategy of gobbling up long-term market share at the expense of immediate profit.

The idea, of course, is simple in retrospect. As the barrier to entry to Amazon's business was quite easy, the company spent inordinate amounts of capital in acquiring strategic partnerships, supply chains, marketing and websites.

As an example of the company's aggressiveness, in just fiscal years 1999 and 2000, AMZN lost $789 million (here and here) from its bottom line from losses sustained from its acquisitions' bottom lines (see Equity in losses of equity-method investees, pg. 24).

So, the notion presented by some analysts that PHOT is wasting money from exchanging PHOT stock for acquisitions misses the exercise. PHOT management will dilute shares and will spend money wrapping up as much market as it can before the coast is clear for reluctant competitors to enter the space, executing a variation of the strategy deployed by AMZN.

Ironically, if investors can think the situation through, the legal peculiarities of the cannabis industry IS PHOT's moat to entry from the "big boys", for now, anyway.

"Our objective with the program is to increase scale, market penetration, revenue and earnings for GrowLife," according to PHOT's 10K of Mar. 31. [emphasis added]

PHOT Fiscal 2013 Earnings

PHOT's earnings release, yesterday, confirms expectations of rapid revenue growth from acquisitions, which soared 235% to $4.85 million for fiscal 2013, compared with $1.45 million posted for fiscal 2012.

The company's net loss also soared to $21.38 million, of which approximately $19.3 million involved non-cash, one-time losses resulting for company stock options, warrants and stock payments for services rendered to suppliers and landlords. On a non-GAAP basis, exclusive of non-cash, one-time charges, PHOT lost $2,038,907, or a loss of less than $0.01 per share.

PHOT revenue from its acquisitions of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC were accretive during Q3 and Q4 only. However, because the company didn't offer guidance, we don't know how much a full-year's revenue will look like for Rocky Mountain and Evergreen during fiscal 2014.

Additionally, no guidance was given for PHOT's Growlife Hydroponics store in Santa Rosa, California, which opened for business in Q4.

Gross margin decreased to 17.5% for fiscal 2013 from 28.4% for fiscal 2012. However, the company believes the decrease in gross margin is temporary.

Cash posted at the end of fiscal 2013 totaled $1.83 million, up from $36,000 for fiscal 2012. Current assets increased to $3.3 million, up from $472,000.

Liabilities jumped to $11.6 million for fiscal 2013, up from $1.6 million for fiscal 2012. $9.3 million of additional liability was incurred from stock-related expenses.

Conclusion

We view PHOT as one of only a tiny handful of cannabis enterprises capable of weathering the stormy horizon of uncertainty regarding legislation, just as AMZN's young management weathered their stormy beginnings.

We're hopeful that investors will view PHOT's strategic initiatives in their proper light and particularities of the cannabis sector.

However, investors of PHOT should not expect profits and multi-dollar share prices anytime soon, if at all. The visibility is too murky at this time. The stock is highly speculative and will experience severe volatility, just as AMZN experienced.

In AMZN's 2Q of 1999 10Q, the company states:

"[I]n general and the market prices for Internet-related companies in particular have experienced significant volatility that often has been unrelated to such companies' operating performance. These broad market and industry fluctuations may adversely affect the trading price of our common stock regardless of our operating performance."

However, we feel that PHOT deserves a couple of percentage points of your total portfolio as a long-term speculative investment in the most exciting sector of the remainder of this decade.

When, not if, in our opinion, the legal and legislative obstacles are removed, Wall Street's traditional financing methods will seek the best-of-breed at that time. We feel that PHOT is the best-of-breed in the nascent cannabis space, and the company has a much better chance of attracting capital in the future than its competitors have.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Growlife: Taking A Page From Amazon