WM Technology: Extremely Cheap And Still Years Of Growth Ahead

Summary

• 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.

Mario Tama/Getty Images News

Investment Thesis

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.

Source: FASTGraphs.com

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)

Risks

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.

Conclusion

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.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[mendo]

The following is not an opinion on use of cannabis itself: For me it is shocking, that illegal businesses as in US as in Canada were even willing let alone able to advertise themselves publicly. One would expect that police and other forms of law enforcment would readily pick them up, especially how transparent they were - easilly to be found and proved of doing an illegal businesses. How is it even possible that it went on for so long? Again, this is not an opinion on use of cannabis itself, just perspective on enforcment of laws and regulations.

[User 52369090]

The most recent earnings report cites YTD basic EPS at $0.39 and diluted EPS at $-0.15. Can someone help me understand how share dilution can turn a profit into a loss? What am I missing?

[Maschuette]

@caden.copeland1 i had to google it because i didnt know either: dilutive eps includes employee stock options while basic does not. New companies give a bunch of stock awards as a percentage to the executives and higher ups.

[Trade In Mexico]

Great article, thank you Manuel! I just started following you.

[Manuel Paul Dipold]

@Trade In Mexico Thanks :) Glad you liked it

[AnalyticsInvesting]

Be very careful on this sentence, as Google can change that any second they want. "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." Plus, read our write up here on their big problem and why they fought so hard to keep illegal listings on the site. cannabis.net/...

[Doctor Dividend]

Note: I did have a few shares so I could follow the company, but sold them for tax harvesting prior to 12/31.

The first 2 comments are correct. When one uses the full dilution that will come from warrants and stock options as well, you have an almost billion dollar market cap, not the $400 million that's mentioned in the article. When you include that, that changes the price target dramatically.

I don't think Google is a major threat currently because of the illegal nature of weed on a federal level. I think they would much rather not grab the revenue from advertising for that just so the DOJ has another reason to look into them further. I could be off base.

The $3800 a month may include some advertising, but is a business in a box that tracks the certain strain from harvest to the point of sale. WM never touches the item - they just help keep track of the item. One thing that wasn't mentioned is the take rate of using the platform. They have mentioned in the past that until Weed is legal on a federal level, there is no percentage of sales through their platform. That is another revenue driver that I like about the company.

the last sticking point is that the larger MSOs will most likely have their own in house technology solution. If the Wild West starts to consolidate, like any industry eventually does, is that going to push WM to the side and when? That may be the greatest risk.

Having said that, I like the pick and shovels recurring revenue aspect of the company as I don't know which public dispensary is going to win. But the eventual dilution one has to account for plus the legalities around the space currently, the risk IMO comes off the table if/when the stock goes below $5 a share. Some long dated options become very intriguing at that point as you hope 2 years clears a lot of uncertainty.

[Manuel Paul Dipold]

@Doctor Dividend Thank you very much for your comment. I think right now any MSO is way too small to create such a platform. I mean Weedmaps users expect a dispensary to show up almost everywhere they are. Right now there would be way too many gaps in MSO´s apps. But if they are big enough to do that in a few years, Weedmaps will already have 20-30 million regular users. It's a threat in the future, but it's far from visible at the moment

[Maschuette]

Thanks for the article. I am very mixed on this company but you provide a good bull case. My big two concerns are:

1) Google - as you mentioned. I hate that their business model competes with Google and that their cost to their clients is $3,800/mo. I don't know how much it would cost to advertise effectively on Google though. I also don't like the idea of using the app for finding dispensaries. Most people (as your article said) have a favorite brand. They also have a favorite shop. Most of their business is repeat business. Paying $3,800 a month for growth is going to be the first thing cut when they stop growing and plateau as all local shops probably do.

2) Equity dilution. Their last earnings report said they do not plan on diluting shares over the next year and plan on using their cash pile and cash flow to cover any additional acquisitions. They did say that they weren't sure they would be able to refrain from raising money in some form. Their current cash and earnings are not enough to cover the acquisitions they did in 2021 so i am concerned they will raise money with a dilution. It really depends on what they want to buy and how much it cost.

I do plan on going long on this stock but only if it drops further. I have had several SPACs that dropped into the $2 - $4 range and am not going to start a position until we get lower.

[Manuel Paul Dipold]

@Maschuette Thanks for your feedback and additions.
I think you're right that using the app daily doesn't make as much sense for people who shop at the same dispensary over and over again. Somewhere on their website I also read that they try to compensate for this with special offers. I would love to read customer experiences, if anyone is a customer let us know ;)
While they do compete with google, it correlates rather poorly. Either someone uses the Weedmaps app, or searches via Google, but probably not both.
Whether dispensaries so quickly eliminate these costs I'm not sure. It depends on what exactly they are getting and to what extent that is measurable. Here in the comments, someone has also written how he spoke with a dispensary operator who considers weedmaps very important in the ecosystem.

[YaoM]

Yahoo Finance is way off on market cap. Diluted shares outstanding is about 162.5mm

[Manuel Paul Dipold]

@YaoM Thanks! yeah that´s important

[harmjano2]

Thanks for this write-up! This stock has been moving like a true rollercoaster pre-merger and post.

Recently spoke with a dispensary owner in South California. He acknowledged recent challenges for legal dispensaries (hard to compete with the illegal ones) and challenges around working capital and taxation as the overall industry isn't legalized. In short: it's a really tough business to be in. But he his view was also that WM plays an important role in the eco-system, and dispensaries may spend 2-5% of their revenues on the platform indefinitely. ("WeedMaps will definitely keep playing an important role in the eco-system").

Also, on dropping the Canada business and the impact on growth rates: while this is very obvious I do feel it is missed by many investors... Q4 will LOOK a lot different even though actual growth will be in line with Q3. Expecting pop after earnings. But who knows...

[Manuel Paul Dipold]

@harmjano2 Thanks for that. Real experiences are a very useful addition! That´s why I love Seeking Alpha´s comment section.