Charlotte's Web: More Than A Feel Good Story

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About: Charlotte's Web Holdings, Inc. (CWBHF)
by: Jeff Vande Hey
Summary

Charlotte's Web is one of the few pure plays in the CBD industry.

Charlotte's Web is a leader in the industry.

Both the company and industry are slated for explosive growth.

Unlike many other "pot stocks," Charlotte's Web has been consistently profitable.

Management seems prepared for the expansion efforts ahead.

Humble and Heroic Beginnings

In 2011, when the Stanley Brothers began developing hemp-based genetics, no one would have guessed that their work would morph into a publicly-traded company called Charlotte's Web Holdings (OTCQX:CWBHF) with a market cap of $1.2 billion just eight years later. In fact, as the six brothers started cross-breeding a strain of marijuana, high in CBD (cannabidiol) and low in THC, they had no idea what to do with it. There was no market.

Charlotte

Image Source: Cityblm.org

Two things changed that picture, and the change was dramatic.

First, Charlotte Figi entered the picture. Charlotte was born healthy, or at least seemingly so, but had her first seizure when she was three months old. The seizures were frequent and severe and, while, when seizure free, Charlotte developed fairly normally, the strong medications took a toll. Charlotte was declining cognitively, and the diet that helped seizures punished her body in other ways. It was a nightmare.

The Figi family heard about and sought out the Stanley Brothers and the sight of Charlotte melted Josh Stanley. Despite concerns about her age, the brothers, along with two doctors, moved forward with CBD treatment. The brothers essentially gave the product away, only asking the Figis to donate what they could. The results were so dramatic and groundbreaking that Charlotte and her recovery were featured on CNN.

The second catalyst was the passage of Farm Bill of 2018, which legalizes the production and sales of industrial hemp and CBD derived from the hemp plant. This not only made it easier to grow hemp, but it has also resulted in a rapid expansion of the number of retail outlets selling CBD oil.

Charlotte Figi

Image Source: Charlotte's Web

The Enormous Opportunity Ahead

The CBD craze is hard to miss. Every day, within three minutes of leaving my house, I see advertisements at gas stations and video stores headlining the fact that they sell CBD oil. CBD has been used to treat cancer, epilepsy, pain, depression, and if you talk to enough people, almost every ailment known to mankind. Sales of CBD oil have grown exponentially in recent years and, as the chart below shows, are expected to double from 2018 to 2020.

In fact, while estimates vary wildly, most recent estimates make those below look conservative. A recent Forbes article predicted a $16 billion CBD market by 2025, up from approximately a $1 billion market today. With a market-leading position, Charlotte Web's challenge is to fend off the newcomers in the space and hold onto its current market share. If the company can do that, its potential opportunity is tremendous.

Data Source: Statista

What Sets It Apart

"Pot stocks" are in vogue at the moment. Not surprising, there is no shortage of companies jumping on the bandwagon and trying to get a piece of the pie. Amongst them are both pretenders and contenders, and in a few years, we will have a clearer picture as to which companies will shake out to be the winners. The question we have to ask is why Charlotte's Web will shake out on the good side. Here are my reasons to be a believer:

  • Charlotte's Web is a first mover, a pioneer in the field.
  • Charlotte's Web is a CBD pure play.
  • Charlotte's Web is solidly profitable. As you can see below, many of the big name pot stocks are not.
  • Charlotte's Web is legit; many "pot stock" companies have not even registered with the SEC.
  • Charlotte's Web is a market leader and has a strong retail footprint already.
  • Charlotte's Web is in growth mode and has brought in an experienced management to facilitate that growth.

Chart Data by YCharts

Growth Mode

Charlotte's Web grew revenue by 74% from 2017 to 2018 and expects approximately 100% revenue growth in 2019. Wall Street expects this growth to be profitable with EPS estimates for 2020 sitting at 73 cents per share, leaving the company with a Forward PE of 17. That is a solid valuation for any company, but more than respectable for a rapidly growing company in a rapidly growing industry.

Charlotte's Web is hardly the same company as it was two years ago and pronounced will make it vastly different two years from now. To its credit, the Stanley Brothers recognized the need for seasoned management to oversee this continued growth. To that end, the company recently hired a new CEO, COO, and CGO. The new CEO, Deanie Elsner, comes on board with experience running a multi-billion-dollar division at Kellogg (NYSE:K).

Challenges Ahead

The biggest challenge in any industry is competition, and it is especially true in an industry that is basically in its infancy. Other pure-play CBD companies like CV Sciences (OTCQB:CVSI) and Elixinol (OTCQX:ELLXF) will not be sitting on their hands. Furthermore, bigger companies with more resources may decide to enter the fray either through their own efforts or merger and acquisition. Increased competition is sure to add to certain expenses such as marketing and put pressure on pricing, lowering margins to a degree.

The Bottom Line

No one has a perfect crystal ball, and I never pictured myself investing in a pot stock, but here I am. I am a believer in Charlotte's Web. The company has won me over with its impressive execution over the last five years, its market-leading position, and new management hires. While I do believe margins will come under pressure in the future, I can stand a little margin contraction when it comes with triple-digit revenue growth. Industry growth projections vary considerably, but with most experts projecting near-term growth of several hundred percent, the pie is sure to get bigger. As long as Charlotte's Web can keep reasonably close to its current slice of the pie, investors should do just fine.

Disclosure: I am/we are long CWBHF. 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.