Manufacturer and purveyor of cannabis-derived consumer products PotNetwork Holding, Inc. (OTCMKTS:POTN) reported its audited FY 2017 results on April 3. The report, verified by East West Accounting Services of Miami, FL, was in line with the company’s unaudited results released in January.
PotNetwork Holding’s astronomical growth—the top line grew a whopping 300 percent year over year—is noteworthy. For investors looking to buy into the burgeoning cannabis industry, PotNetwork’s rock-bottom valuation is the icing on the cake.
The reaction to April 3rd version of last year’s audited results sent POTN shares—closing just below $0.40 per share, up more than 30 percent from April 2nd’s $0.291 close.
The timing couldn’t have been better. The cannabis firm has been on a downward slide since peaking at $0.96 in early in the year as investors rushed in following the release of its year-end results.
The company has continued to make good on its promises—something that real investors in PotNetwork Holding have no doubt taken note of. Its unaudited revenues for FY 2017 came in at $14,499,000—precisely what was reported in the audited results.
Its gross profit of $5.18 million (35.73 percent of revenue) is that of a healthy consumer products business. In addition, despite the massive marketing expenses that go hand in hand with a young, fast-growing enterprise, the company eked out a profit of $178,918 for the year. Not bad, given that the ultimate “growth” stock of them all—Amazon (AMZN)—reported GAAP losses for years.
All the better, the company is on track to follow up last year’s blistering showing with 70 percent plus top-line growth in 2018. On March 15, before the first quarter had ended, Senior Advisor to PotNetwork Holding Bruce Barren confirmed that the company had been experiencing a $2 million monthly revenue run-rate. Were the company to maintain this pace, and fail to grow the business even a cent from its latest results, FY 2018 revenues would fall in the range of $24 million. Not too shabby.
Analysts join the fray
Small-cap stocks such as PotNetwork Holding are always tricky to value. Professional financial analysts have only recently begun wading into the CBD industry, reviewing PotNetwork’s financials for the first time.
So far, the company has garnered the attention of two firms, SeeThruEquity and Harbinger Research, that are now devoting resources towards rating the company’s merits and assigning a rating on its shares. Both have concluded that it is a buy as shares trade far below their common price target of $1.25 per share. This is over 200 percent higher than April 3rd’s close—worthy of any investors attention.
But analyst’s ratings are never enough—investors need to understand WHY analysts believe a stock is under or overvalued. The serves as comfort during any inevitable price volatility. Which brings us to the purpose of this article. To relay a quick, back-of-the-envelope method for valuing company’s like PotNetwork Holding: Price-to-Sales.
How much is growth worth?
Management estimates that PotNetwork Holding will grow the top line by another 70 percent in 2018.
This would equate fo FY 2018 revenues of ~$24.65 million. We are now into Q2, and there is no reason not to take them at their word. Management crushed last year’s full-year revenue estimates by a whopping 71 percent.
What’s more, PotNetwork Holding is on pace to deliver on 2018’s estimates as of the end of Q1—a period where it generated over $6 million in revenue according to the company’s CEO. Finding companies that are 100 percent comparable to PotNetwork Holding is difficult. The industry is young, and no two companies are entirely alike.
That admission out of the way, I took the price-to-sales multiples of two favorite cannabis stocks and compared them to PotNetwork Holding.
The valuations aren’t even close:
|Trailing P/S Ratio||YoY Quarterly Revenue Growth*||Forward P/S Ratio|
Prices as of April 3, 2018. (Source: Company Filings and YCharts. *Quarterly results may not match due to reporting differences.)
You can see now why analysts see some (speculative) potential in PotNetwork Holding.
Data across the budding cannabis industry is not the best—so take any of the implications from the above table with a grain of salt. But the numbers speak for themselves. PotNetwork Holding is trading at a VERY reasonable price given its growth rate. To drive the point home, take current market-darling NVIDIA (NVDA).
Of course, it’s not a cannabis stock but when thinking about potential investments industry doesn’t matter. All are equal when things like financial metrics are involved. NVIDIA makes advanced graphics processor chips and has budding divisions in the autonomous driving, data center, and artificial intelligence markets.
All “hot buzzwords” on Wall Street and why, in addition to the company’s laudable growth, the NVIDIA sports a sky-high valuation. NVIDIA’s financials have been on fire—but not as spectacular as PotNetwork Holding. This makes sense. The latter is WAY smaller, and size acts as a drag on growth potential.
Nevertheless, in spite of its whopping $140 billion market cap and lower growth, NVIDIA commands a premium sales multiple over PotNetwork Holding:
|Latest YoY Quarterly Revenue Growth||33.96 percent|
|Trailing P/S Ratio TTM||14.23|
|Forward P/S Ratio||10.69|
None of this is to say that one should compare NVIDIA to PotNetwork Holding as potential investments.
But it begs the question: someone has to be wrong with disparities such as these. If it can keep its growth up multiple-expansion is not just likely, investors should expect it.
What investors need to know
If all goes well, PotNetwork Holding will likely earn a higher price-to-sales multiple. It also wouldn’t be surprising if this went hand-in-hand with the company joining an exchange that will give them more significant investor exposure (shares currently trade OTC) and regularly reporting results to the SEC.
PotNetwork Holding is growing, and it’s a matter of time before everyone catches on.
This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
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