This one’s not exactly a tightly-controlled secret (though the ad makes it sound like one), but we’ll put the Thinkolator on the case anyway… we’ve gotten lots of questions about the latest marijuana pitch from Jimmy Mengel, who is advertising subscriptions to his Marijuana Manifesto service ($1,999/year) — seems that plenty of people want to know what his secret “Apple of Pot” stock is, and, well, we aim to please.
The general push of the ad is that you have to be invested by July 1, mostly because Mengel thinks that the pending move to full recreational legalization in Canada on that date is going to spur huge investor interest and open up new markets and get everyone excited… but this isn’t a Canadian pot stock, so the impact is indirect. (And yes, Canada is moving to that full legalization this Summer… though there’s plenty of talk about it being delayed meaningfully beyond that July 1 date, presumably both because of implementation complications and legislative foot-dragging.)
This stock apparently has some connection to the “Silicon Valley of Pot”, which is also called the “epicenter of the cannabis movement” and referred to obliquely in a few other ways, and that’s clearly a reference to the historical center (for last 50 years, anyway) of the marijuana cultivation movement in the US, Humboldt County and neighboring areas of Northern California.
Here’s a little snippet that covers his big picture argument:
“Canada will become the first ‘rich’ country to make pot legal. Not just decriminalized or unenforced but 100% lawful.
“Investors worldwide — and especially investors here in the United States — will be keeping a close eye on how it unfolds…
“They’ll see how early investors in legal marijuana firms stood to book gains as high as 11,084% and how new millionaires are minted in the process.
“You can bet when this happens, they’ll turn their attention to the United States…
“Where the marijuana market is set to top $35 billion by 2020…”
And then we get into the specifics about the stock…
“I say the Silicon Valley of pot is the most exciting marijuana opportunity I’ve ever seen — specifically the secretive company working on Project IVXX that’s been dubbed the Apple of Pot! ….
“Like Apple, it’s working on a hush-hush project, called Project IVXX.
“It took me two weeks to persuade the investor relations manager to get me on the phone with the CEO…
“Even then, it wasn’t easy to get the information I needed. But I did. And for the first time in financial publishing, I can reveal exactly what Project IVXX is…
“But before I go on, you should know that I have permission to share the details with you today. What you’re about to hear is akin to having insider information on the iPhone before the public knew it existed.
“Project IVXX is a program for creating and producing proprietary blends of marijuana.”
That seems a little silly — who would have a secret program for producing proprietary blends? Every manufacturer is trying to develop consumer-focused brands in marijuana, certainly all the pot companies are aware that it wasn’t the generic tobacco farmers who became wealthy, it was the developers of the brands like Marlboro who created consumer demand and loyalty (addiction helps with the loyalty, of course).
That’s what has mostly kept me out of marijuana investing, the notion that the plant itself is relatively common and easy to grow, and that the profits in the end are likely to go to whatever the most powerful consumer brands end up being… and we don’t know that yet (and I don’t know the industry enough to identify an up-and-comer brand with any great insight).
And of course, as we’ll see in a moment, this “Project IVXX” isn’t secret at all, it is actively marketed by the company both to customers, as a brand they’re trying to get distribution for, and to investors, as a distinguishing aspect of the company. More on that in a moment. Other clues of import?
“The company has developed and acquired a custom state-of-the-art extraction lab — reminiscent of Apple’s own bleeding-edge tech. It lets the company produce the finest grade marijuana that’s tailored to customers’ needs and feedback…”
OK, what else?
It actually has some revenue…
“Between 1Q 2016 and 1Q 2017, it boosted revenue by 340%”
And they also have a New Jersey business, which might provide some upside…
“… you should expect legalized recreational cannabis in New Jersey very soon. And once again, its proximity to New York will be a massive boon.
“Our company — based in the heart of the Silicon Valley of pot — already has huge environmentally controlled greenhouses in New Jersey.
“Right now, they’re used for growing herbs and vegetables, but that could all change with pot laws. Meaning, not only is this company positioned in the biggest market on the West Coast, California, but also in one of the largest on the East Coast, too.”
So… hoodat? This is, sez the Thinkolator, Terra Tech (TRTC)… again, not super secret, since the real name of that secretive “Project IVXX” Mengel talks about is, well, IVXX. Which, in case you’re wondering, is a roman numeral interpretation of “420,” the longstanding shorthand/slang term for marijuana.
And yes, IVXX is effectively an attempt at a high-end brand in marijuana, with selected hybrid flowers and a variety of other products that, yes, are produced in what they call their “innovative and extremely advanced extraction labs.” They do have growers in Humboldt County, though Terra Tech itself is headquartered near Los Angeles.
Terra Tech also has a second brand in marijuana, the Blüm Medical Cannabis dispensary that has a couple locations in Nevada and California… and yes, to confirm the match they also own the large Edible Garden greenhouse in New Jersey, which seems to be a successful hydroponic vegetable grower that they say they’re actively expanding to other markets as they try to build a grocery brand, though it seems quite likely that they would immediately ditch Edible Garden if New Jersey law changes and they have the option of generating 10X the return with marijuana growing in that same facility (though they’ve been talking up this potential for four years, so I don’t know what the actual prospects might be).
Terra Tech does indeed have pretty good revenue growth, as well — though the one quarter they call out in a graph in the ad is their best quarter (no surprise there), with 340.8% year over year revenue growth in the first quarter of 2017… in the most recent quarter they grew revenues at 46%. The next report should be the year-end 2017 earnings, which will come out right around the end of March (it was March 31 last year), and investors will certainly have an eye on those top-line growth numbers — but the bottom line is not all that likely to be meaningful in the near future.
Terra Tech’s income statement calls our attention to the fact that this is a high-growth business, but also that it must be very competitive, with everyone trying very hard to gain a toehold, because the spending growth is extraordinary. There is no particular indication that the business is getting to be big enough to have any economies of scale at the product level, their cost of goods sold has generally grown just as fast as their revenue, but in the September quarter they did show some signs of growing into their SG&A spending, so things are moving in the right direction.
I’ll be curious to see what they say in their next conference call, they do have their license to sell recreational marijuana in California, so if they are able to get a toehold in that huge business with their Blüm dispensaries and/or the IVXX-branded products they could ramp up sales growth pretty dramatically — I have no idea what the competitive landscape is like in that consumer pot business in California, but there are at least hundreds of competitors so there is certainly a challenge in ramping up to try to take share. I do like the focus on that IVXX brand — it’s hard to see competitive artisanal dispensaries being leveraged into huge businesses, but you can imagine a packaged item like their IVXX joints or CBD oils or vape cartridges building brand awareness and a following. Doesn’t mean it will happen, but it seems possible.
So that’s an interesting one, it obviously carries all the regulatory risks of other US marijuana companies, which in the eyes of Attorney General Sessions probably includes “all of them” but, to my mind, particularly puts those whose business is predicated on a big boom in recreational marijuana at elevated risk (if there’s to be more legislative compromise, medical marijuana is far less controversial), but Terra Tech’s early brand-building efforts do catch my eye… and it’s not a micro-size company but it is quite small considering the possible eventual size of the legal recreational market.
Whether you think that’s worth their current $230 million market cap, of course, depends mostly on how active your imagination is — and you probably do have some time, assuming they don’t have a profit bombshell in their next earnings report, because their current pace of spending means they should be raising money again pretty soon with more equity sales, which tend to depress the price at least temporarily… and if they’re really trying to ramp up spending to take meaningful share of the California market, I would assume that the next equity offering will be a big one. You can see their latest investor presentation here if you want more of an overview of the company.
So there you have it… the so-called “Apple of Pot” is Terra Tech, and you can make your own call about whether the price makes sense given their financial performance and their market opportunity. So go forth, researchify to your heart’s content, and let us know what you think with a comment below… maybe we can all make each other just a little bit smarter.
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