Elixinol Stock vs. Charlotte’s Web Stock
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This year we’ve taken a small break from looking at marijuana stocks and trained our focus on the recent legalization of hemp in the United States and the popularity of cannabidiol or CBD products for applications like reducing anxiety or facilitating sleep. We talked about how hemp food relates to CBD, and pointed out A Good CBD Stock for Cannabidiol Investors. Now, we want to look at another cannabidiol stock that’s come across our radar – Elixinol – that seems to be quite similar to Charlotte’s Web. We decided to take a closer look as to how Elixinol stock compares to Charlotte’s Web stock. (All numbers are in USD unless stated otherwise.)
About Elixinol Stock
Founded in 2014, Elixinol Global (EXL:AU) is a publicly traded Australian firm that manufactures and distributes hemp-based dietary supplements and skincare products through a number of subsidiaries. In January of 2018, shares of Elixinol began trading on the Australian Stock eXchange (ASX) and have since risen +105% giving the company a present-day market cap of around $291 million. The company can be subdivided into three separate entities that include a hemp food business based out of Australia, a CBD supplements business based out of Colorado, and an Australian entity that plans to focus on the Australian medicinal cannabis market.
2018 revenues totaled $26.5 million with the Elixinol segment driving the majority of revenues (87%) for the business through the sale of CBD products which are sold through a variety of different channels – direct-to-consumer (22%), wholesale (15%), bulk (25%), and private label (38%). The end result is a business that’s demonstrated strong, consistent growth over the past few years.
While revenues have been showing strong growth, the company has been burning through some cash. In September of 2018, they raised nearly $30 million from institutional investors and their last filing shows a cash balance of around $31.5 million with plans to burn through around half of that in Q1 2019. A good chunk of that spending ($4.89 million) falls into capital expenditures which “primarily relates to equipment and fit out of the new Colorado production facility” which they say will double production capacity.
They’ll need to increase production capacity if their plan to sell into the European market goes through. Last month, Elixinol announced the formation of a 12-person sales team that will begin selling its products “directly into retail stores via the newly upgraded ecommerce channels.” The company has been selling products in Europe since 2017 but it reflects a minuscule percentage of their current revenues.
Given the excitement investors have been generating around the CBD theme, raising more money shouldn’t be a problem for Elixinol. Investors need to pay attention to dilution when these raises happen. They’re trying to aggressively grab as much market share as they can, so you’d expect that they’ll spend a whole lot of money doing that. A simple metric to track which reflects the progress they’re making is revenue growth. If they can do that while geographically diversifying their revenues, even better.
Elixinol vs. Charlotte’s Web
We recently wrote an article on Charlotte’s Web (CWEB), a company that we had some good things to say about. That article is what prompted one of our readers to let us know that he believed Elixinol offered better value than CWEB for a number of reasons that he elaborates upon in a recent article titled Is Elixinol the Fastest Growing Hemp/CBD Producer? We have paraphrased the main points of the article as follows:
- Valuation based on a multiple of sales
- Elixinol’s gross retail sales are significantly larger than shown and they have a vastly superior growth rate
- CWEB was underwritten in Canada by a firm more famous for floating gold mining scams
- His industry contacts say that CWEB began a month-long sale in January, discounting to retailers, for the first time.
- Elixinol has several cutting-edge products hitting the market, ahead of competitors
- The Elixinol management team is more open, aggressive, and balanced
The first two points are the main reasons why the author believes Elixinol is the better of the two stocks. Let’s talk about valuation first.
Elixinol’s sales of CBD for 2018 were around $23 million (we don’t include the hemp food sales because Charlotte’s Web only sells CBD products) and for Charlotte’s Web they expect that “total annual revenue for 2018 will fall between $65 to $80 million.” If we take the middle of that estimate, $72.5 million, then we can see that CWEB has roughly 3X the revenue of Elixinol but with 5X the market cap. One could argue that the “revenue to market cap ratio” ought to be more similar between these two firms. All things being equal, this means that either CWEB is overvalued or Elixinol is undervalued. The author believes that Elixinol is undervalued because both stocks are actually undervalued. If you look at both Elixinol and Charlotte’s Web relative to cannabis stocks, again you see a case where either CBD stocks are undervalued or cannabis stocks are overvalued. For example, Canopy Growth (CGC) has a market cap of $15.75 billion and 2018 revenues of 78 million giving them a “revenue to market cap ratio” of 20X. Since cannabis investors behave extremely irrationally, perhaps it’s a bit of both.
The third point raised is something we’re always looking at with extreme suspicion given we regularly warn our readers about how pervasive over-the-counter scams are. Most the time, these scams are businesses with no revenues and some master plan we’re all supposed to blindly throw money at. In looking at the CWEB financials, we didn’t see anything that would be cause for concern unless they’re cooking the books entirely. We’re in touch with Charlotte’s Web so we’ll see if they can comment on that.
The last three points relate to CWEB’s product pricing strategy, the merits of competing products, and the relative quality of the management teams at each firm. These three points could be argued by each company quite convincingly so would hold less weight than something more concrete like valuation.
Why Not Both?
As the article states, “both of these companies produce high-quality products, both were early innovators, both are primarily in Colorado.” The author concludes that investors ought to hold both. We would also add a few more points around diversification that would support a case for investors to consider holding both stocks:
- One stock (EXL) can provide you with exposure to the Australian market and Australian dollar while the other (CWEB) gives you exposure to the Canadian market and Canadian dollar
- The logical move is not try and guess a winner but instead to buy shares in both companies which gives you a currency diversification effect and helps eliminate company-specific risk
When you’re investing in an extremely volatile theme, you want to eliminate as much risk as possible. There’s also a third “CBD stock” that we haven’t looked at yet – CV Sciences – so stay tuned for a coming article on that topic.
There has been quite a bit of consolidation in the cannabis space lately, but there is a certain amount of trepidation around the regulation of CBD in the United States which seems to vary drastically based on each locale. As investors, we need to acknowledge these risks. What if suddenly there was talk about stricter regulations around CBD? You might just see all three CBD stocks on sale for 30% off. With volatile stocks like these, you should always use dollar-cost-averaging to open your positions slowly over time to remove what they call “market timing risk.”
Of course, this just emphasizes the importance of geographical diversified revenue streams. If Elixinol can demonstrate some success selling into Europe, that geographical diversification of revenues would make the stock more appealing in the face of regulatory risk. Charlotte’s Web is also looking to build their international exposure, and the first region they plan to expand into is Western Europe. The Company expects revenue in this region to be between 10% and 15% of the Company’s consolidated revenue during the 2019 calendar year.
Geographical revenue diversification would also appeal to the large Canadian marijuana growers who may look for bolt-on CBD offerings once the regulatory risk is removed. This is what Tilray (TLRY) was after when they acquired Manitoba Harvest. While Manitoba only sells hemp products that don’t presently contain CBD, Tilray planned the acquisition as a way to pivot into CBD. If the regulations pose a problem, they still have a hemp food business and no harm done.
Conclusion
There’s a term they use in finance called “domestic bias” which refers to the propensity that investors have to buy what they know. If you’re an Italian investor, you’re likely to have most of your money tied up in Italian assets. For Americans, this may be a lesser problem with the emergence of multinational firms like McDonald’s which derive their revenues from around the globe and are consequently more geographically diversified. Still, you will be increasingly diversified if you buy foreign stocks on foreign stock exchanges using foreign currencies.
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