Fool’s “One Stock for the Coming Marijuana Boom”

by Travis Johnson, Stock Gumshoe | September 12, 2019 1:01 am

A version of this article was originally published on November 8, 2018, but we have gotten a huge number of questions and the Motley Fool[1] is again aggressively promoting this same basic pitch, so we’re re-posting and updating this solution for you (along with a bonus at the end). The latest variation of the ad had the headline, “CEO Bets $1.1 billion on 1 Legalization Stock,” and several other variations tout it as a “backdoor play” into the fast-growing cannabis market, but the basic spiel is pretty much unchanged.

Most of the marijuana[2] teasers last year focused on the Canadian pot stocks, since those were and are the only large and fully legal pot-focused companies (outside of pharmaceuticals), and the Motley Fool went so far as to launch its own marijuana advisory about a year ago and tease one of those as “Tom Gardner[3]’s favorite,” (that was Namaste, if you don’t remember — we covered it about a year ago[4])… but late last year they launched the first marijuana teaser pitch for their regular ol’ newsletter (Motley Fool Stock Advisor[5]), so we’ll cover that for you. Or uncover it, I guess.

Here’s how the original version of the ad launched last year:

“A little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

“And make no mistake – it is coming. To the tune of an estimated $50 billion….

“Legal marijuana was worth $10 billion for the U.S. in 2017 alone. And since experts have projected the U.S. industry to skyrocket to $50 billion by 2026, it’s time for investors to start paying attention.”

Which has been updated to this now…

“A little-known Canadian company went public and is already making people rich, including one lucky insider — a ski bum with strong coding skills — who made $1.1 billion with his stake in the company.”

And then the tease…

“… we’ve been quiet on this growing marijuana industry for a while.

“Until now.

“Because a game-changing deal just went down between the Ontario government and a powerhouse Canadian company.

“And that company – which now has the opportunity to rake in profits from the $7 billion Canadian cannabis industry AND potentially the $50 billion US cannabis industry – is no stranger to us here at The Motley Fool.”

They say that this is a stock they’ve recommended before, so perhaps it’ll be one we’ve covered in the past… and they drop a few specific clues that we can feed to the Thinkolator for you… clues like:

“The stock is already up 148% over the past year….

“locked in key partnerships with behemoths like Facebook and Amazon”

“… the company’s CEO declared that he thinks they’re only 2-3% into what this company could eventually become.”

They also say that the company is not dependent on marijuana — apparently they’d still be A-OK even if the genie gets crammed back into the bottle and marijuana is banned forevermore, but they’re clearly excited about the pot potential for this particular pick.

And… well, that’s about it for clues. Ready for answers? This is our old friend Shopify (SHOP)[6], which has been teased before for its somewhat tenuous connections to the marijuana industry — Shopify sells services and software for ecommerce, and they do indeed provide the hosting and online shop software for several of the big vendors of marijuana in Canada[7], including, critically, the Ontario government. Sales growth has been gradually trending down, as one would expect, but is still close to 50% (it was around 100% a year three years ago, when the Motley Fool first started teasing the stock [8]around $30, so this particular pick has worked out quite well.)

Several Canadian provinces, including Ontario, BC and Newfoundland, started selling online only through government-owned portals, partly because their privately licensed pot retailers weren’t open at the starting gun for legalization, so folks in Toronto or elsewhere in Canada’s most populous province had to buy their marijuana online through a Shopify store if they wanted to buy legally in the first few months last winter. Ecommerce is expected to be a pretty major part of the marijuana business in Canada otherwise, too, including in provinces where the government is licensing shops instead of operating retail stores themselves, and Shopify, as Canada’s tech champion these days and the highest-profile (and arguably easiest to use) ecommerce enabler, is likely to get a lot of that business. They’re even specifically marketing it on their site.[9]

But, still, it’s important to highlight that “this company is not dependent on marijuana” bit — mostly because we should make clear that Shopify will also probably not benefit that much from marijuana.

It’s not really clear what the sales picture will be in the long run, mostly because all the estimates for online pot sales in Canada are wild guesses, but Shopify CEO Tobias Lutke (he’s the one who owns well over a billion dollars worth of stock, by the way — because he founded the company and hasn’t sold his whole stake, not because he bought shares) did reportedly tell Bloomberg[10] last year that they’ve structured their contracts to “capture the upside” of marijuana sales volume, but we don’t really know what the specifics are in those contracts — most Shopify customers pay a monthly fee for the software ($29/mo for basic, up to $299/mo for advanced) and either use Shopify’s payment processing services, which have another fee embedded, or pay 1-2% of transactions as a fee for use of the platform, but larger “Shopify Plus” contracts for substantial businesses are individually negotiated.

If Ontario’s marijuana ecommerce operation generates $500 million in gross merchandise volume in a year, for example (that’s probably high, just an example), that would mean Shopify’s revenue from that business would probably be in the $5-10 million neighborhood… maybe a bit more if they really do have some special deal with the pot companies and provinces. That’s arguably meaningful, but it’s not likely to drive the company’s results anytime soon — Shopify merchants post almost $14 billion a quarter in sales, and Shopify is currently on pace for $1.5 billion in annual sales itself (mostly from those fees and software subscription charges), so it would take a lot for one segment, even a potentially big one like marijuana, to move the needle dramatically.

They do have some advantages — they spent some effort on providing a product that would work for pot sellers, and it’s a cloud-based offering that can be tweaked quickly to comply with regulatory changes… and they also have gone a long way toward providing “internationalized” versions of Shopify in other countries, so perhaps they’ll even make some headway as European countries begin to follow Canada’s lead in legalization.

So is it possible that pot will mean big things for Shopify? I guess, but it depends what you mean by “big” — I’d be very surprised if this ever impacts Shopify’s revenues by more than 5%, and it’s hard to gauge the impact of that for a company that’s already growing revenues by 50% a year. I don’t believe the online cannabis business has even risen to the importance of being mentioned in any of Shopify’s earnings press releases, and I don’t think it has ever even come up as a question on their conference calls.

Shopify has been a pretty volatile stock for years, I own shares and have mostly just let it bounce around as it has stayed in a range and hasn’t tripped my stop loss triggers, and I remain very impressed with management and with their very ambitious goals and their focus on investing in a great product and aggressive growth to dominate their sector. They’ve created a great and easy platform for retailers, and no one else does it as well — they’ve even outdone Amazon, which is saying something, so the news this summer that they’re also going to invest in a fulfillment network to more aggressively compete with Amazon and its delivery and warehousing capabitilities also caught everyone’s attention — even buying warehouse automation company 6 River Systems this week for $450 million, which was sort of reminiscent of Amazon’s acquisition of Kiva Systems in 2012 (Shopify facilitates selling through lots of platforms, including Facebook and Amazon, so to some degree they’re also partners with the big guys).

So it’s a great company, I’m really impressed by them… but it’s also crazy expensive, which continues to attract short sellers who see an easy path to knock the shares down a few notches (Citron was a very vocal short last year, and other have jumped in and out — about 11% of the float was sold short last Fall when I wrote the first version of this article, that has dropped wdown to more of their “normal” range, around 3% now).

And I’m not joking about the “crazy expensive” part. SHOP currently trades at 30X sales and about 380X next year’s forecasted earnings (it was at about 200X earnings last November when the first version of this ad rolled through), and they have pretty consistently said that they are focusing not on earnings but on growth, reinvesting to build the network and improve their products and services even if that means disappointing earnings-focused investors — so in that way they do clearly emulate Amazon, particularly when it comes to keeping the long view and talking about building a dominant business at the cost of current profits.

Still, they are now profitable, just barely (and on an adjusted basis), and that means earnings growth will probably be remarkably high for a while (going from 10 cents to a dollar is much faster growth than going from one dollar to two dollars)… and if you use 2020 numbers instead of 2019, well, the forward PE is only 200 instead of 380. So that’s something.

I last added to my Shopify position over a year ago, and, in fact, I sold a little bit at just about this price last month (to nibble on another foolishly speculative Canadian tech stock[11]), but SHOP is still a top ten holding in my Real Money Portfolio because it has risen so insanely fast. I still think it’s appealing, I love the company and am really impressed by Lutke and the rest of the management team, but the valuation is so nutty that I would probably be nervous risking more than 1-2% of my portfolio on this particular stock. Pot or no pot.

That’s just my worry shining through, though, and what matters, of course, is what you think — it’s your money, after all. Feel like a toke of SHOP fits your portfolio? Expect bigger things for marijuana, or international expansion, or whatever? Or do you sympathize with the short sellers who think I’m crazy to pay 30X sales for this stock (remembering that they also said it was crazy to pay 15X sale last year, and the stock has tripled since)? Either way, please let us know with a comment below.

And yes, for those who are looking for the answer to a variation of this ad, there’s also one that says the Motley Fool Stock Advisor is now recommending only two marijuana companies — neither of whom depends on marijuana legalization in the US to succeed. The second one is a stock we covered much more recently, that’s Charlotte’s Web (CWEB.TO, CWBHF), the Colorado hemp CBD company that was teased as Tom Gardner’s first marijuana pick a couple months ago — you can see my story about that one here[12].

Disclosure: I own shares of Shopify, Facebook, Charlotte’s Web and Amazon among the stocks mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s rules.

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