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New Age Beverages – A Cannabis Drinks Stock?

Every new technology goes through a predictable cycle when it comes to moving from initial innovation to commercial adoption. That’s what global research and advisory firm Gartner decided to model with their “Gartner Hype Cycle” which has since been taught to MBAs around the globe. The Wikipedia entry that describes the Gartner Hype Cycle also references something called Amara’s law which states the following:

We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run

That’s exactly what you can see in the below diagram which is often used to depict the Gartner Hype Cycle:

Gartner Hype Cycle

Gartner Hype Cycle – Credit: Gartner

While some pundits say that this doesn’t actually hold true when applied to the real-world, there are some examples of where it does fit. 3D printing technology, for example, was hyped to such an extent that many companies just started to attach themselves to the 3DP story by stating “an intent” to enter 3D printing. That statement of intent alone was enough to see many dubious over-the-counter (OTC) stocks temporarily surge upwards with huge “gains”, only to come crashing down over the following years creating a bunch of bagholders in the process. Fast forward to today and we see 3D printing being successfully commercialized at scale with valuations having returned to something that more closely resembles reality.

Here’s where Gartner thinks that a lot of the disruptive technologies we discuss here on Nanalyze ought to be placed on their timeline:

Gartner Hype Cycle for Emerging Technologies in 2018

Gartner Hype Cycle for Emerging Technologies in 2018 – Credit: Gartner

Whether or not you agree with those classifications is irrelevant, because we’re actually going to turn our attention away from technology and apply this same principle to the disruptive nature of Mary Jane.

Cannabis – The Peak of Inflated Expectations

It’s hard to imagine that we’re not at the peak of inflated expectations when it comes to marijuana stocks. Casual comments are being force-fed meaning (much like all those 2X2s you see MBA students force-feeding during Business Strategy Class). Media companies are painting everything in a positive light because that’s what people want to read about. Nobody is talking about how burnt investors will be when the inevitable decline into the “trough of disillusionment” happens. And there are some signs that we’ve reached that point in time.

Lately, we’ve seen some price action in cannabis stocks that completely detaches the price of a company from the underlying fundamentals in a manner that seems inconceivable. Here’s where Canopy Growth keeps company these days, and we recently looked at how miniscule Canopy’s revenues are in comparison to all of these other household names:

Canopy Growth Market Cap Comparison

Credit: Bloomberg

You’d need some serious cojones to short that sort of unbridled optimism in any industry that seems to be approaching peak hype.

When it comes to Canada, things have all but taken off and there are plenty of marijuana stocks for retail investors, some of which are dubious at best. In the United States, on the other hand, there are few publicly traded cannabis stocks. Instead, we see no shortage of new startups popping up left and right, which is intuitive because publicly traded companies will naturally be subject to more regulatory pressure. That’s because marijuana is still illegal in the United States on the federal level, and that poses huge risks for publicly traded companies who have a reputation to protect as well.

Corona and Coca-Cola

All those concerns seem to have evaporated when not only the makers of popular Mexican beer Corona expressed an interest in entering the cannabis drinks space, but also one of Warren Buffet’s darlings. The icing on the cake was when dividend champion Coca-Cola (KO) suggested that they were keeping an eye on cannabis beverages. At this point, any company that just says they intend to enter the cannabis drinks space or they “plan to in the near future” is seeing a price spike. Look no further than New Age Beverages, a stock that has skyrocketed +330% in just 30 days on speculations that the company would begin distributing cannabis drinks.

New Age Beverages 6-month Stock Chart

New Age Beverages 6-month Stock Chart – Credit: Nasdaq

So, just who is New Age Beverages?

New Age Beverages

Click for company homepageNew Age Beverages (NBEV) is a beverage distributor that mainly distributes other people’s products and also markets their own beverage product lines. In the first three months of this year, NBEV brought in revenues of around $11.5 million and saw losses of $2.6 million. As of March 31, 2018, three customers accounted for approximately 30% of their revenues. Revenues for the last quarter are allocated into two segments:

  • 75% – The DSD segment distributes beverages throughout Colorado and surrounding states, delivering to approximately 6,000 retail customers.
  • 25% – The Brands segment sells beverages to wholesale distributors, broad-liners, key account owned warehouses and international accounts using several distribution channels.

The brands segment is made up of the company’s own beverage offerings and is a segment they are focused on growing lately by making a number of acquisitions. Their stated goal is to become the “world’s leading healthy beverage company” and a look at their brands shows a focus on things like tea, coconut water, and kombucha – essentially all that overpriced swill that’s peddled in Starbucks these days. It may or may not be a decent business to invest in, we have no idea really. The key takeaway here is that New Age beverages is in the business of creating and distributing beverages. Now, let’s move on to talk about what might have made NBEV stock jump +330% in 30 days.

New Age Beverages and Cannabis Drinks

Now that you understand NBEV’s current business model, just think about how cannabis would be thrown into that mix. The biggest hurdles that immediately present themselves are the legal restrictions around cannabis since it is illegal at the federal level and only legal in some states. As a publicly traded company that distributes beverages, these are the sorts of things you might expect to be regulated:

  • Storage – There are unique regulatory requirements for storing cannabis beverages in a warehouse in much the same way that grow operations are regulated.
  • Distribution – Haven’t seen any marijuana tea at your local Safeway? Neither have we. Retail outlets that apply for a license are then able to sell marijuana products.
  • Transportation – Can you just throw cannabis drinks in the back of your trucks and off you go? Is it illegal to transport them in large quantities?

These are just some questions that need to be answered, and since marijuana is illegal at the federal level, each state will have different answers to those questions, licenses that need to be obtained, and idiosyncrasies that need to be dealt with when selling and distributing beverages which contain cannabis derivatives. Large distributors can’t be asked to muck around with the small stuff, so they’ll likely wait until the market becomes fully legal. Here’s why we think that.

What New Age Beverages Actually Said

Bloomberg published an article on October 4th titled “New Age Beverages Is In Talks With Retailers for CBD Pre-Orders” which no doubt fueled the fires even more. The article talks about how New Age Beverages will be debuting their CBD portfolio next week at the North American Convenience Store Show in Las Vegas. Of course, there aren’t any cannabis drinks in convenience stores yet, so this must be about planning for a future when marijuana is legal at a federal level. The CEO, Bruce Wills, says as much:

“It’s all preparation,” Willis said. When laws are approved to legalize CBD beverages across the U.S., he believes New Age will be “the first to execute it in real scale and in a professional, responsible way and on a national basis.”

Trying to handle things on a state-by-state basis will be much more difficult, which is why the market is so fragmented at the moment. Mr. Wills mentions “thousands of little players” in the CBD beverage market, and obviously, New Age Beverages would have an advantage provided they could actually use their infrastructure without worrying about state-by-state laws and licensing. Who knows how far away we are from seeing marijuana legalized at a federal level, but you can be sure that New Age Beverages isn’t the only distribution company keeping an eye on cannabis drinks.

Coca-Cola and Cannabis Drinks

Let’s stop for a second and look at exactly what Coca-Cola said their intentions were for cannabis beverages. Again, let’s go to an article from Bloomberg on the topic. The article was previously titled “Coca-Cola, Aurora Cannabis in Talks About CBD Oil Soda”:

Bloomberg article title

Source: Google Search

Pull up the article today and it’s titled “Coca-Cola Is Eyeing the Cannabis Market“. While the title has been changed, the messaging remains the same. It clearly says that Coca-Cola is in talks with Aurora Cannabis:

Bloomberg article title

Source: Bloomberg News

Here’s what Coca-Cola said in an email to Bloomberg News according to the above article:

“We are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world,” Coca-Cola spokesman Kent Landers said in an emailed statement to Bloomberg News. “The space is evolving quickly. No decisions have been made at this time.” Landers declined to comment on Aurora.

Then, Aurora put out a press release that said the following:

The Company’s policy is not to comment on speculative media reports. The Company does confirm that it engages in exploratory discussions with industry participants from time to time. At this time the Company confirms there is no agreement, understanding or arrangement with respect to any partnership with a beverage company. In accordance with applicable disclosure requirements, Aurora will advise the market of material changes when they occur.

Companies are required by law to advise when there are material changes to their business, and rumors are not material. Essentially, we have nothing but speculations and rumors driving the price of New Age Beverages’ stock. Instead of listening to speculations and rumors, let’s look at what material changes actually happened over the past month or so based on the most recent 8-K filings from NBEV:

  • 2018-09-24 – NBEV and Roth Capital Partners may offer and sell from time to time up to an aggregate of $50 million shares of the Company’s common stock.
  • 2018-09-24 – Creation of Series C preferred stock which the CEO and Chairman exchanged common stock for
  • 2018-09-05 – Postponement of annual meeting of shareholders
  • 2018-08-29 – $12 million aggregate principal amount revolving credit facility
  • 2018-08-22 – Agreement by Roth Capital to buy 8,200,00 shares at $1.28 per share

(We also noted that the SEC had raised some questions in August about their method of accounting and these have since been addressed.) None of these material changes can explain why the share price increased by over +300% in thirty days. You can’t blame NBEV for making hay while the sun shines and raising as much possible funding as they can while their shares are being sold at a premium. Just remember that selling more shares results in shareholder dilution, something that always seems to be glossed over during periods of hype.

Conclusions

The fact that large media outlets are going back and only updating the title of these articles as opposed to issuing a correction certainly doesn’t serve to quell all the hype we’re seeing in the cannabis space right now. “If you feel so strongly about this thesis then why don’t you short the stock” we can hear people ask. As we’ve said before, you do not try to short crowds that are behaving so irrationally. What we can do is try to learn more about the hype cycle that all emerging investment themes are subject too, and then we’ll get better at figuring out at what point during the hype cycle is the right time to invest.

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