- Since the IPO, the company has had to solve some problems and the market has not responded well.
- WM Technology is an opportunity to bet on the growth of the cannabis market without betting on individual MSOs.
- In the last 6 months, the stock has lost 66% of its value, which makes the valuation on next year's sales look extremely cheap.
- The company published a report in November 2021 with interesting insights about the cannabis market in America.
WM Technology (NASDAQ:MAPS), the company behind Weedmaps, has been dominated by negative headlines in recent months, resulting in very negative momentum that continues to this day. I would like to explain why this is an overall overreaction and why, in my view, there is now an excellent buying opportunity.
Problems since the IPO
Since the IPO in June 2021, WM Technology has been going almost exclusively downhill. On the one hand, this followed the general trend also seen in cannabis MSOs, but on the other hand, there were specific challenges within the company. First, part of the U.S. business had to be given up at the end of 2019, as some of the cannabis vendors could not provide sufficient licensing. In the third and fourth quarters of 2020, the same thing happened in Canada, causing the entire Canadian business to be completely lost. Furthermore, there were concerns, particularly in California, that legal operators would have a difficult time competing with illegal operators. To make matters worse, the stock lost about 40% of its value in November after EPS of $0.02 was half of what was expected and YoY growth was only 9%. This was too much for many investors and the stock is now only at one-third of its original value.
Not as bad as it seems
If we look at this slide from the Q3 presentation, we see several interesting aspects. First, even at peak times, the lost Canadian business accounted for about 25% of sales. No question, that's a lot, but it's long been priced in. Second, the "weak" YoY growth Q3 2021 vs Q3 2020 does not include the fact that Q3 2020 was the strongest quarter for sales in the Canadian business.
Source: Q3 Presentation
One could also interpret these numbers quite differently and say that it is very surprising that YoY sales grew at all, even though all of Canada broke away. So this growth comes from the US business alone. And here the numbers are very strong indeed. More precisely 46% sales growth YoY. And there are even more positive developments: The number of monthly active users ("MAUs") grew 37% to 13.9 million YoY. The monthly average revenue per paying client increased 7% to $3,817. Monthly average paying customers increased 24% to 4,444 (considering only the US business).
How do they make money?
Overall, the business model is delightfully simple to understand. The app helps consumers find dispensaries in their area. Of course, this is especially helpful when traveling, if you are a stranger in the area yourself. So the goal is that consumers don't search for dispensaries on Google, but directly in their Weedmaps app (although even in Google search, Weedmaps almost always shows up on the first page). So these dispensaries are paying to show up in the app in the first place. Furthermore, similar to Google, clients can pay-per-click to appear as a featured listing. Additionally, WM Technology is working to provide even more value to their clients as a cloud-based SaaS model, with useful statistics and more.
WM Technology's product suite includes point of sale, logistics, wholesale, and ordering solutions that enable clients to scale their businesses while complying with the complex and disparate regulations applicable to the cannabis industry.
Source: Weedmaps Corporate Overview
Q4 and next year outlook
I am mentioning the revenue figures in particular here, as growth is easily measurable there and EPS will still be subject to strong fluctuations for further years. High expenses for fast growth and acquisitions are normal processes for any fast-growing company, and WM Technology is no exception.
The fourth quarter is expected to be in a similar range to Q3: Between $50M and $52M in revenue, which will bring the full-year revenue to approximately $190M. Analysts expect 30% revenue growth next year, which seems quite likely given the current growth in the US business (don't forget that Canada will be out of the YoY comparisons as of next year). According to Yahoo Finance, the company currently has a market cap of $412M. Even with far less than 30% revenue growth next year, the P/E ratio would still be below 2.
Yahoo Finance expects 2022 EPS of $0.35, but let's just assume $0.25 to be on the safe side. At today's price of $6.32, this would correspond to a P/E of 25. However, it is not unlikely that there will be another capital raise to make further acquisitions or to drive international expansion. Either way, other tech companies that are growing at 30% p.a. are usually priced much higher and have more competition. According to Fastgraphs, this could result in a growth of 26% CAGR by the end of 2023.
Cannabis in America
The insights validate what we see every day: The stigma around cannabis is fading as it becomes more embedded in our culture and daily lives
Chris Beals, CEO of WM Technology.
The company recently (Nov 2021) released a report titled: Cannabis in America. It focuses on social acceptance and consumer behavior, especially regarding certain brands and trends. Of course, there is more, but here are some facts from the report that I found very interesting:
- 72% of cannabis users say that everyone or almost everyone knows that they use cannabis.
- 50% said their use has increased since the pandemic began.
- In the first half of 2021, there was a significant shift toward cannabis deliveries (60% vs 40% first half of 2021 vs 2020)
- 54% of consumers have a favorite brand
- 27% would use cannabis in a workplace social setting (e.g., company happy hour)
Of course, WM Technology also has risks. Every dispensary would rather save the costs they are currently paying monthly. What they could do, for example, is advertise directly on Google when someone types in a relevant search. However, this will never reach the customers who search directly in Weedmaps' app. I think the growing number of paying dispensaries shows that it is worthwhile for them to be listed and probably they will stay listed. The same will be true if competing apps emerge that will put pricing pressure on Weedmaps. But from the point of view of the dispensaries, this would not be a pleasant situation. They would like to avoid paying for even more apps. Ultimately, this would likely lead to a winner-takes-it-all scenario.
Furthermore, there are currently many enhancements and improvements to the Weedmaps app, especially for paying customers. Ultimately, for WM Technology, it's about building a moat so that switching costs and efforts for dispensaries are getting higher and higher. However, software changes take time and it is never certain whether everything will be accepted by customers as hoped.
Overall, the share was very strongly punished by the market, although the overall Q3 numbers and prospects for the US market are very good. Some did not understand that this 9% YoY growth was heavily distorted (Algo trading?). All in all, the company still has tremendous potential and is supported by an overall growing cannabis market.
This article was written by
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