We have written a number of articles covering CBD companies but have come to realize that much of the public (and investment community) is either unaware of or unfamiliar with CBD. In this article, we will spend some time familiarizing investors with the industry and publicly-traded companies in the space.
1. CBD’s Popularity is Skyrocketing
The WSJ, Bloomberg, New York Times, Forbes, and other major news organizations have recently published pieces on the compound, which has become the focus of intense public interest and scrutiny. In our view, this is because there is growing public awareness of mental health issues such as anxiety and depression along with a focus on treating such issues. CBD has emerged as a potential way to treat these problems, which has made it a topic of popular interest among Americans.
Another reason why CBD is generating so much buzz is because it does not have any of the intoxicating properties of its cousin THC, rendering it (mostly) free of the stigma associated with cannabis. In addition, many who may not be able to use marijuana for personal or professional reasons may be likely to try CBD as an alternative. Unlike THC-based marijuana, CBD does not show up on drug tests and does not impair one’s judgment or ability to work.
CBD also recently passed marijuana in terms of search interest in the United States, a strong signal that CBD is gaining significant momentum:
(Source: Google Trends)
We believe that increasing search interest is a leading indicator of increasing CBD sales across the United States and demonstrates that the following is occurring right now:
- People across the United States are beginning to hear about CBD from friends, family, the media, and other sources.
- They are likely using Google to find out more information about the compound.
- If their interest is piqued, they may make an experimental purchase to see if CBD might help them with a particular issue.
- If CBD works for them, these individuals will likely recommend the product to friends and family (who will also go online to look into CBD).
- In aggregate, this cycle should lead to greater revenue for CBD companies, leading to greater investor interest and subsequently higher valuations.
2. CBD is Considered Safe for Humans
CBD was declared by the World Health Organization in September 2017 as safe for consumption by humans. The WHO report stated that “CBD is generally well-tolerated with a good safety profile” and that “there is no evidence of recreational use of CBD or any public health-related problems associated with the use of pure CBD”.
The report also noted that there is also “preliminary evidence that CBD may be a useful treatment for a number of other medical conditions”. In particular, it described the progress made by GW Pharmaceuticals (GWPH) to commercialize its Epidiolex drug, which is a liquid formulation of CBD.
Epidiolex won approval last year by the FDA to treat two rare forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome.
3. Passage of the 2018 Farm Bill
The Agricultural Improvements Act of 2018 (also known as the 2018 farm bill) was signed into law on December 20, 2018. The aspects of the bill that are most relevant to the commercialization of CBD products are as follows:
- The bill legalizes industrial hemp cultivation across the United States. Industrial hemp is a strain of the Cannabis sativa plant that can be refined into a number of important commercial products, including textiles, plastics, clothing, paint, animal feed, and others. Previously, hemp cultivation was restricted to a small number of pilot programs.
- Legalized hemp is restricted to 0.3% THC; any hemp that contains a greater concentration of THC is considered non-hemp cannabis, which is still federally illegal as a Schedule I drug.
- This legislation also explicitly allows for the interstate movement and commercial sale of hemp-derived products (including CBD).
This legislation may in fact increase competition in the CBD industry as more companies are likely to get involved in the space since industrial hemp production is now legal. However, existing companies have first-mover advantages and are more likely to get acquired down the road by larger companies.
4. Attractive Valuation
Charlotte’s Web (OTCQX:CWBHF) and CV Sciences (OTCQB:CVSI) are the two largest publicly-traded pure play CBD companies. They have the largest market share within the highly fragmented industry (PlusCBD is CV Sciences’ CBD brand).
(Source: Brightfield Group)
CWBHF and CVSI are trading at much lower valuations (on an EV/sales basis) relative to Canopy Growth (OTC:CGC) and Tilray (NASDAQ:TLRY), which are two of the largest publicly-traded marijuana companies.
|
Company Name |
Ticker |
Enterprise Value |
LTM Sales |
EV/Sales |
LTM EBITDA |
|
Tilray Inc. |
NASDAQ: TLRY |
4.09 billion |
56.8 million |
73.9x |
(71) million |
|
Canopy Growth |
NYSE: CGC |
9.5 billion |
173.5 million |
54.8x |
(390) million |
|
Charlotte’s Web |
OTC: CWBHF |
1.54 billion |
78.1 million |
21.3x |
16.4 million |
|
CV Sciences |
OTC: CVSI |
372 million |
55.1 million |
7.02x |
6.8 million |
(Source: Yahoo Finance)
Part of the reason for this valuation gap (in our view) is due to the fact that Tilray and Canopy Growth are listed on major U.S. stock exchanges, while CBD companies are not. Listing on major U.S. exchanges allows for more institutional investment and greater access to potential investors (for example, Robinhood only allows its users to invest in companies listed on major U.S. exchanges).
Another reason is because CBD is still a relatively unknown compound to most Americans. We believe that it will take some additional time for awareness of CBD to spread both to the mainstream public and the investment community. Full-length articles covering Charlotte’s Web and CV Sciences can be found here and here.
5. Variety of Use Cases and Applications
As mentioned earlier, CBD has emerged as a promising solution for rare forms of epilepsy, including Dravet syndrome and Lennox-Gastaut syndrome (LGS). It has also gained popularity as a treatment for anxiety and insomnia, per this article published on the Harvard Health Blog.
This article (published in biomedical journal publisher Cell Press) does an excellent job of outlining several of the misconception and claims regarding CBD’s therapeutic benefits. Note the following excerpt, which provides a useful summary of CBD’s potential as an alternative medicine:
“CBD is frequently mischaracterized in lay, electronic, and scientific sources as ‘non-psychoactive’ or ‘non-psychotropic’ in comparison to tetrahydrocannabinol (THC), but these terms are inaccurate, given its prominent pharmacological benefits on anxiety, schizophrenia, addiction, and possibly even depression. More accurately, CBD should be preferably labeled as ‘non-intoxicating’, and lacking associated reinforcement, craving, compulsive use, etc., that would indicate a significant drug abuse liability [1].”
In addition to the above, CBD is currently being also being used to treat pain and arthritis in the elderly, according to the AARP. While the results from research on CBD’s efficacy in these areas are mixed, preliminary evidence suggests CBD may be effective in treating osteoarthritis.
The compound has also become popular as a way to treat nausea, stress, anxiety, gastrointestinal issues, and other problems in dogs. The compound canines similarly to the way it does in humans, binding to cannabinoid receptors and modulating bodily processes without “any threatening side effects”.
Risks to the Thesis
The following may derail the CBD industry’s growth trajectory and/or the prospects of the companies mentioned in this article:
- The FDA made headlines this week for sending a letter to Curaleaf to advise the company to stop making claims about the beneficial effects of CBD, which the FDA feels are thus unproven. If the FDA takes a strict stance on cannabidiol, it is possible that CV Sciences and Charlotte’s Web may have to curtail their sales and marketing efforts (which would negatively impact their sales growth).
- The CBD industry is highly competitive and becoming even more so – according to the Brightfield Group, a market research firm which specializes in the CBD and cannabis industries, “more than 150 brands of hemp-derived CBD products and more than 850 brands of marijuana-derived CBD-only products are currently being sold through dispensaries nationwide”. This may lead to losses in pricing power, lower margins, and many companies failing.
- There is not much scientific research and evidence to back up the positive claims that have been made about CBD – it is possible that CBD does not have the beneficial effects that have been touted by its supporters, or that these effects are minimal at best.
Final Thoughts
While the future of the CBD industry is uncertain and subject to a number of risks, it is almost a certainty that the industry will continue to grow rapidly and that a few companies will emerge as the eventual winners in the space (either as successful independent companies or acquirees) of larger companies who want to get involved in the industry.
We have written articles about a number of cannabis and CBD companies and will continue to do so to keep readers updated and informed. Thank you for reading and we welcome all comments and feedback.
Disclosure: I am/we are long CVSI, CWBHF. 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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