Trust doesn’t appear out of thin air; in the case of investing, trust is established through a history and track record of profitable returns, and when a company is diversified, it is communicating to the public that it is foundationally strong enough to explore other areas of growth without jeopardizing its core competency. It’s this type of self-confidence that investors would be wise to take notice of, and a diversified cannabis company is no different.
“As with any investment, a diversified cannabis company limits its exposure to any one segment of the industry,” Erick Factor, Executive Chairman of Canada based MYM Nutraceuticals, told INN. “This helps reduce the volatility that can negatively impact companies with singular visions. The cannabis industry is currently undergoing an unprecedented phase of growth, and there are understandably some associated growing pains. Being open to all potential opportunities ensures companies can avoid some of the pitfalls that might otherwise become setbacks.”
With most marijuana stocks currently in some form of expansion mode, either by boosting production capacity or expanding clinical studies, there is no shortage of cannabis companies looking for investment.
The average investment in a cannabis company for 2017 is $100,000, according to a 2017 survey by Marijuana Business Daily. Feeding this popularity is the number of diverse types of businesses and revenue streams available for companies to venture into, like a facility that grows cannabis, proprietary technology, strategy, licensing and partnered distribution, and research and development. Diversified cannabis companies are more likely to be cash flush―a signal that it has the financial building blocks to hold itself up during any ebbs and flows it could go through.
Diversification improves working capital and cash flow
Two things investors should look for in a company is its working capital and cash flow. A company’s working capital is the simple measure of its current assets minus its current liabilities. You should be on the lookout for a positive number or ratio.
Paying attention to working capital can give investors an idea of whether a cannabis company has the capital to survive these early years of development and expansion.
Commonly, a company that has successfully diversified, and tapped into several revenue-producing areas, will stand a better chance of a positive working capital.
Similarly, cash flow (the flow of money coming in versus going out) paints a picture of how a company is set up for short-term and long-term success. More money going out than coming in over a sustained period often ends in the bottom falling out. However, a diversified company can replenish one area of the business with cash generated from another area.
Diversified cannabis companies reduce your risk
As an investor, you should always be on the lookout for ways to reduce your risk. Understanding how to balance risk versus reward is essential for profit. A cannabis company that has diversified by entering several areas of the industry could be less prone to risk by spreading its exposure across multiple industry subsets, such as consumer goods, healthcare, or media and technology.
If one leg of a business suffers, other legs can be used to keep the business moving forward. With multiple segments of the cannabis industry on a path to growth, there are ample opportunities for cannabis companies to diversify, reducing risk for investors.
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More than 69 percent of consumers regularly use at least two different types of cannabis products, according Brightfield Group data; 34 percent regularly use at least three.
The increasing segmentation in the cannabis industry is drawing companies into diversification based on consumer interest.
“Investing in a diversified cannabis company reduces investor risk simply by not putting all of one’s eggs into one basket,” said Factor, a well-known expert in the medical marijuana industry who has two decades of experience in cultivating medical marijuana and manufacturing cannabis by-products . “MYM ensures diversification through multiple revenue streams in geographically diverse markets and is constantly looking for new opportunities to capitalize on the changing wave of global public opinion regarding cannabis products.” MYM Nutraceuticals’ CBD lines include products for both humans and animals, and the company is involved with building production facilities around the world, limiting exposure to any one environmental or geopolitical risk.
Geographically diverse companies see faster profit growth, study finds
Businesses that have customers in multiple cities are far more likely to be prosperous, according to a study released this year by the Business Development Bank of Canada (BDC).
A study of the energy sector showed that of 998 Alberta companies surveyed, with five to 499 employees, seven in 10 of them with clients in more than one city had 10 percent or higher annual revenue growth in the past three years. Only three out of 10 companies with clients in just one city saw the same level of revenue growth.
“The message is clear—diversification is a critical strategy for Canadian businesses to succeed in these challenging times,” said BDC chief economist Pierre Cléroux in a release. “Business owners who fail to do so may be missing growth opportunities and putting their company under unnecessary risk.”
“Six in 10 such companies [in the construction industry] achieved 10 percent or higher annual revenue growth over the last three years—compared to only three in 10 companies that offer only one product or service line,” BDC said.
And the cannabis industry is no different. Canadian companies are eyeing US and global markets, and as Daniel Pearlstein, analyst for Dundee Capital Markets says, “Canada is probably three to four years ahead of any other country in terms of the scale of companies that we’ve been building.”
While more American states are voting in favor of recreational legalization―now 1 in 5 Americans live in a state where recreational marijuana is legal―US companies are still faced with federal restrictions that prevent them from receiving corporate tax breaks, exporting products across borders, and investment in research and development, because patents are federally issued.
As legalization takes hold in the US, Canadian companies are flush with the opportunity to export their knowledge, and their product, down south.
“Canada’s large-scale commercial medical marijuana program is the most sophisticated in the world, which has created demand for Canadian licensed producers to share their expertise in exchange for fees, royalties or shares of their businesses,” writes Sunny Freeman of the Financial Post.
Canadian cannabis businesses that have geographically diversified have a clearer path to profit.
Types of Revenue Streams
Now let’s talk about the types of industry segments that companies could venture towards in hopes of successfully diversifying.
Often the first point of entry into the cannabis industry, dispensary operations come with a high level of competition. In markets which limit the number of dispensaries, competition for licenses is fierce.
In Arizona, over 700 applicants competed for 31 dispensary licenses by October 2016, while markets that don’t limit the number of dispensaries like Colorado and Washington resulted in squeezed margins with the large number of stores putting strong downward pressure on product prices.
These are products that facilitate the industry’s operations, but don’t touch the plant. Examples include real estate; packaging; marketing; legal services; consulting; software development; and suppliers of growing needs like equipment, and gardening products.
These are attractive because of fewer, if any, regulations, and they are easily scalable.
Edibles and Infused Products
This segment has been spurred on by the rapid growth in demand for edibles and infused products, which accounts for approximately one-third of cannabis products sold.
Cultivation and retail was the top sector for capital raises in 2017 with $478 million of private cannabis investment, according to “Investing in the Cannabis Industry 2017”, an industry report published by New Frontier Data and Viridian Capital Partners.
Grow with the industry
Investors will struggle to find an industry with a more consistent long-term growth rate than marijuana. North American legal sales grew at 34 percent to $6.9 billion in 2016, and total legal cannabis sales in North America are projected to reach $21.6 billion by 2021, growth that is larger and faster than the dot-com era.
Understanding the ins and outs of any of the thousands of cannabis companies your money may go towards will help you make a better decision now, and in the future, as the industry continues to grow.
This INNspired article was written according to INN Editorial standards to educate investors.