OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 01/13/2023
“Pick and Shovel” Companies May Not Be Safer Than MSOs
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- Before 2022, it was commonly believed that “Pick and Shovel” companies that are suppliers to the MSOs were safer places to invest in the cannabis universe.
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- 2022 proved that wisdom is incorrect. An equal-weighted basket of the agriculture technology stocks in the graph declined by 80% in 2022, compared to a 73% decline in the MSOS ETF.
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- Two companies, Agrify (AGFY: Nasdaq) and Hydrofarm (HYFM: Nasdaq), experienced sharper declines of 99.6% and 94.5%, respectively. Even the group’s best performer, Scotts Miracle Grow (SMG: NYSE), was down 69.8%, barely beating the MSOS ETF.
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- The color-coded segments of the bars in the graph add up to the total projected funding requirements (negative net cash flow) as a percentage of the market cap. Every company, except Scotts Miracle Grow, is expected to have negative EBITDA (green). Interest expense (blue), CAPEX (yellow), taxes (purple), and debt maturities (black) all increase projected negative net cash flow. The companies on the graph have funding requirements that range from 338% of the market cap for Agrify to 5% for UrbanGro (UGRO: Nasdaq). Note: cash taxes are negligible for the group, given their negative EBITDA and lack of 280e exposure.
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- The red line on the graph shows total liabilities to market cap. We have found that ratios over 3x generally indicate financial stress/distress. Leverage is a critical consideration for companies in this industry because equity issuance is highly dilutive at current prices and may not be possible for companies with negative 2023 consensus EBITDA estimates. Surprisingly, however, Agrify completed an $8.7M equity raise in December, pushing its stock lower by over 40%.
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- Companies like Agrify and Hydrofarm, which have significant negative cash flows and total liabilities / Market cap over 3x, are in danger. GrowGeneration (GRWG: Nasdaq), Scott Miracle-Gro (SMG: NYSE), and Urban Gro (UGRO: Nasdaq) have small negative net cash flows and easily manageable leverage and should be able to finance themselves readily.
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- There is no inherent safety in investing in “pick and shovel” companies. Investors need to be focused on cash flow analysis to spot potential portfolio problems early.
