Medical Marijuana Is Undervalued At 3.2x Forward Sales

With Q1 revenue growing at 92% y/y and a gross profit of 78%, Medical Marijuana (OTCPK:MJNA) recently surprised the market. The quarterly results were beneficial, and the company is undervalued at 3.2x forward sales. Other competitors are trading at much higher valuations. If MJNA continues delivering favorable revenue growth, the share price should increase. Market participants will most likely accept paying $0.21 per share.

Business Model

Medical Marijuana Inc. is focused on the development, sale, and distribution of hemp oil containing cannabinoids. Source: Company’s Website

It is impossible to review all the hemp oil products offered by MJNA. With that, let’s mention a few facts that are making MJNA a leader in the sector. The company offers free shipping and guarantees that the entire hemp oil delivered is produced in ISO-certified facilities. Besides, shareholders obtain 20% discount when they acquire products. The image below was taken from the company’s website:

Source: Company’s Website

The list of products includes CBD oil, CBD edibles, facial hemp cream, hemp seed oil, cbd for pets, vaporizers, and hemp snacks among many more products. See the image below for more details on the hemp oil sold:

Source: Company’s Website

The reviews received from customers are very beneficial. As of May, 27, 2019, the company received 935 reviews, noting the excellent service provided by MJNA. Clients remarked the good taste of the company’s hemp oil, and physicians also provided great reviews. Also, note that the company was mentioned on the BBC, Forbes, Fortune, and The New York Times, among others.

The images below offer further information on this matter:

Source: Company’s Website - Howard S.

Source: Company’s Website

Assessment Of The Website

The company's website receives more than 0.176 million visitors each month, which is significant and very beneficial. Notice that the company was created ten years ago, and the cannabis industry is very young. The images below offer further information on the matter:

Source: whois.com

Source: SimilarWeb

66.52% of the total amount of traffic comes from search engines, and only 19.8% of the total amount of traffic comes from direct engines. It means that many people don’t know the company’s website. Most visitors don’t go directly to the site. However, they are very interested in the world of cannabis and find the website when they investigate the benefits of cannabis. A list of traffic sources is shown below:

Source: SimilarWeb

Income Statement

On May 22, 2019, Medical Marijuana, Inc. released its Q1 report. The market reacted very well to the new numbers. Investors pushed up the share price from $0.06 to more than $0.07. It shows 16% stock returns, which market participants should appreciate quite a bit. See the charts below for more details on the most recent market reaction:

Source: Seeking Alpha

The most beneficial in the new quarterly report was revenue growth. MJNA delivered total revenue of $20.2 million, 92% more than that of Q1 2018. Besides, gross profit also increased to $15.8 million, delivering 117% y/y growth. The gross profit for the quarter amounted to 78%, which is a better figure than that reported by other cannabis operators. See the table below for further details on the top of the P&L:

Source: 10-Q

The net income was very appealing with $9.53 million, which is much better than the number reported in Q1 2018, -$134 million. With that, the cash flow from operations was not beneficial. The company released a CFO of -$2.44 million with FCF of -$2.87 million.

Most cannabis operators are not delivering positive FCF. Thus, market participants should not pay a lot of attention to the negative FCF. What matter the most to assess the valuation of MJNA are its revenue growth and gross profit margins.

See the table below for further information on the cash flow statement:

Source: 10-Q

Balance Sheet

On the balance sheet front, market participants should notice that the company does not own a large amount of cash. As of March 31, 2019, cash in hand was equal to $3.6 million.

The most significant current assets are inventory, worth $5.6 million, and notes and loans receivable, worth $5.2 million. Market participants will most likely not like the loans receivable. It should not be one of the activities of MJNA to offer loans to other businesses. With this in mind, let’s understand what are these notes.

As shown in the lines below, the notes accrue interest at the average rate of 3% per year. Most investors will believe that 3% is not a high interest. It is not beneficial as the company may generate more returns by investing in the cannabis business. Besides, there is one borrower who received $3.081 million. He is also the lender of a convertible note issued to the company. There is an apparent conflict of interest in these transactions.

Source: 10-Q

The image below offers the list of current assets reported in the last quarterly report:

Source: 10-Q

Among the list of non-current assets, goodwill represents 43% of the total amount of assets, and investments in equity securities comprise of 32% of the total amount of assets. Market participants may worry about the total amount of goodwill. Notice that accountants may decide to impair the intangible assets, which could lead to share price depreciation.

With that, the amount of goodwill reported by other competitors of MJNA is also significant. MJNA is not at all an exception in this regard. Keep in mind that cannabis operators are buying competitors to increase their revenue growth.

As of March 31, 2019, MJNA owns a significant stake in Axim Biotechnologies (OTCQB:AXIM), which develops treatments of pain and other medical disorders. AXIM trades on the OTCQB. Considering this fact, MJNA may have trouble in selling its significant stake. It is an issue. If the company needs additional cash, it may not be able to sell a lot of shares of AXIM. See the lines below for further information on the matter:

Source: 10-K

A list of the non-current assets is shown in the image below:

Source: 10-Q

Liabilities

The total amount of liabilities is not worrying with an asset/liability of 4.5x. The total liabilities are equal to $23.4 million, with $15.1 million in convertible notes. See below for more details on the list of liabilities:

Source: 10-Q

Regarding the financial debt, notice that MJNA is paying interest of 8% per year. Most investors will not appreciate that the company offers loans and receives interest of 3% per year but pays 8% per annum to note holders. Notice that the notes are also convertible into stock. They can generate stock dilution, which could push the share price down.

Check the lines below for further information on the company’s notes:

Source: 10-Q

Equity Structure And Valuation

As of March 31, 2019, the share count is 3,604 million with a float of 2,369 million. Notice that many stocks trading on the OTC Markets have a low float and exhibit volatility risk. MJNA’s float is high, which is favorable. The table below offers further information on this matter:

Source: 10-Q

At $0.07, the total market capitalization approximates to $252 million. With $3.6 million in cash and debt of $15.1 million, the enterprise value approximates to $263 million.

With revenue of $20.2 million in Q1 2019, forward revenue of $80 million in 2019 is reasonable. The EV/2019 Forward Revenue is equal to 3.2x, which is quite low as compared to other competitors. As shown in the chart below, peers are trading at 3x-15x forward revenue:

Source: YCharts

Besides, the revenue growth of peers is not much more significant than that of MJNA. They report revenue growth between 25% and 284%. Additionally, the gross profit margin of MJNA is more significant than that of many peers. Notice that they report a gross profit margin between 26% and 95%. See the charts below for further details on the matter:

Source: YCharts

Conclusion And Risks

MJNA is trading very undervalued as compared to other peers in the cannabis industry. Both the revenue growth and gross profit margin justify EV/Forward Revenue higher than 3.2x. With a ratio of 10x forward sales, the share price could go close to $0.21 per share. If the company continues to deliver decent revenue growth and MJNA can sell shares in a better exchange, the share price should increase.

With that, there are certain risks. If the cannabis industry stops growing at a fast rate, the total capitalization will most likely decrease. As a result, MJNA could see downward pressure on its share price. Besides, if MJNA cannot exhibit the same revenue growth in the future, the company’s share price could also decline.

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.

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