PotNetwork: A Gamble For The Daring Investor

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About: Potnetwork Holdings, Inc. (POTN)
by: Frederic Laudenklos
Summary

The pot market is expected to grow by 350% in the next ten years.

Cannabis is especially popular among millennials.

Fierce competition pose a real challenge for PotNetwork Inc.

PotNetwork Holdings Inc. (OTCPK:POTN) is the parent company of several cannabis-related subsidiary. It is committed to be a domestic force in this upcoming market and offers a wide range of cannabis-related products. So is an investment in POTN a good idea for getting exposure to this sector?

The Pot Market

More and more investors are getting interested in cannabis-related stocks as they see the potential of this new and upcoming market. Cannabis consumption was always worldwide and wide spread despite being illegal in most countries. Now, as more and more countries are considering legalizing it not only for medical purposes, but also for recreational purposes, it is widely believed that this market has the potential to grow significantly. This potential becomes more lucid when one looks at the numbers already showing.

It was estimated by various analysts that in the year 2018 cannabis would generate about $11 billion in sales. This is more than the revenue of the NFL or of Canadian Hockey in 2017 and almost as much as the sales figure of US beer sales in 2018. Since Cannabis is still not legal on all 50 states, the market observer easily gets an idea about its future.

The same holds for the EU. Whereas cannabis is still treated as an offense in all EU countries, imprisonment for minor offenses is either not possible at all or it is advised against by internal guidelines. (Source) And although the sale and purchase of recreational cannabis is still not legal, penalties for its consumption do not exist in countries like Germany, Italia and Austria. And since the 2000s there has been a strong push towards cannabis-related decriminalization. (Source)

So, it is likely that this market is going to rise as the drug gets legalized in more and more countries. But by how much?

According to BDS Analytics and Arcview Market Research sales are expected to rise by 350% in the next ten years, realizing $29bn in 2024 and more than $47bn in 2027. Of course, the prudent investor should keep in mind that this is just a rough estimate, but even if we deduct about 150% due to unfavorable future regulation of this new industry and the possibility that once it is fully legal it is no longer as attractive to some, a growth forecast of 200% over the next ten years still looks pretty good.

This optimistic view gets only stronger when we consider new findings of New Frontier Data: Not only seem millennials to be the main consumers of cannabis, but they also seem to consider it a pretty safe pleasure. According to New Frontier Data's findings, 74% of consumers think that it is less dangerous than alcohol, while 73% who were asked whether they were more likely to consume cannabis now that it was legal answered yes. (Source)

PotNetwork's Portfolio

Let us now look at the company and the company's portfolio. PotNetwork's portfolio consists of ...

  1. blue CBD
  2. diamond CBD
  3. Chill Plus Gummies
  4. Relax Extreme CBD
  5. CBD Biotech Cream
  6. Relax Vape Liquid
  7. CBD Re-Leaf
  8. CBD Double Shot
  9. Pet CBD Food
  10. Liquid Gold
  11. Meds Biotech
  12. Relax Gummies
  13. PotNetwork (a news network reporting on cannabis business and stocks)
  14. Chong's Choice CBD
  15. Lawrence Taylor Pain Master
  16. CBD Honey Sticks
  17. The Fatty (Diamond CBD mix)
  18. First Capital Venture
  19. MediPets
  20. Grinders Distribution
  21. Lean Shot
  22. Chill (Gummy Bears)
  23. CBD Crystal Dabs
  24. CBD Shots

Although that this portfolio might seem impressive, it is noteworthy that PotNetwork Inc. is a relatively new company that was previously known as United Treatment Centers Inc. (prior to 2015). And since the entire cannabis market in its current form is a new, emerging market, many of those aforementioned brands are still relatively unknown and still developing. And since POTN is a rather small OTC listed company, competition is likely to have a deep impact on this small company.

The Competition

Competition in this upcoming market is high, as everyone wants his slice of the pie. The following four Canadian companies are among the largest players and some of them already engaged in merger and acquisitions.

  1. Canopy Growth Corporation (OTC:CGC), market capitalization of 13.74 bn, NYSE listed. This company was founded in 2014 as Tweed Marijuana Inc. and acquired Storz & Bickel, a German manufacturer of vaporizers, last year. The company last reported a revenue of $62.49M.
  2. Aurora Cannabis (OTC:ACB), market capitalization of $8.99bn, NYSE listed. In 2018 Aurora bought the 2 rival cannabis growers MedReLeaf and CanniMed and is now the second largest Cannadian cannabis producer considering its market cap. It last reported a revenue of $40.73M.
  3. Tilray Inc. (TLRY), market capitalization of $5.18bn, NASDAQ. The company operates in multiple countries such as the United States, Canada, Germany, Australia, New Zealand and Portugal. It last reported a revenue of $15.53M.
  4. The Scotts Miracle-Gro Company, market capitalization of $4.49bn., NYSE listed. This company is one of the few cannabis producers with already positive EPS. It even pays a dividend with a yield of roughly 2%. It last reported a revenue of $298.1M.

In comparison to this fierce competition the PotNetwork Inc. seems more than small. The company reported net operating revenues of $5.5M in 2015, $1.05M in 2016 and $14.5M in 2017. The operating income fell sharply from 2015 to 2017. The company reported an operating income of $1.4M for 2015, but only $99,000 and $207,000 for the years 2016 and 2017 respectively.

The Investment View

Given that POTN is an over-the-counter stock that lacks the liquidity of its rivals and given that some of its rivals already report strong earnings while paying dividends, an investor who wishes to have some exposure to the pot market might prefer the bigger and more established companies for his portfolio. On the other hand a more daring investor who is actively looking for an opportunity overlooked by many, POTN could be an interesting cannabis gamble.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.