Researchers tested a new form of medical marijuana that treats pain but doesn’t get the user high, prompting patients who need medical marijuana to declare, ‘Thank you?’ – Jimmy Fallon

When Vegas steps in, you know it will be big, loud, and flashy, and Planet 13 Holdings Inc. (OTCQX:PLNHF) exemplifies this perfectly.

Planet 13 Holdings Inc. is a vertically integrated cannabis company based in Las Vegas, Nevada. The company is probably best known for its massive cannabis superstore located just off the Vegas strip. Their flagship store recorded an impressive $63M in revenue and over one million visitors in 2019, accounting for nearly 10% of all of Nevada’s cannabis sales that year.

A store of this kind would have been unheard of only a few years ago. At 13,000 square feet, this complex is massive. Consumers have access to a coffee shop, bistro, event space, and, of course, the dispensary itself.

It’s far closer to a ‘cannabis experience.’ Something you’d expect only Las Vegas to birth. It’s a destination in and of itself for cannabis connoisseurs visiting Sin City. Not only that, but much of the product sold in this superstore is produced directly by Planet 13 Holdings Inc. Nearly 30% of all sales in the superstore were inhouse brands.

Source: Planet 13 September 2020 Corporate Presentation

Compared to its peers, PLNHF has performed remarkably well since its inception in 2018, though the last two months have seen the name fall by over 25%. However, this recent drop may offer an opportunity to obtain exposure to PLNHF at a discounted price.

Chart, line chart, histogram Description automatically generated

Source: YCharts

Like most businesses, Planet 13 didn’t escape the economic pain brought on by COVID. Q2 2020 revenue was down at $10.76M compared to the previous four quarters, which all surpassed $16M. Lockdowns all but closed their superstore temporarily.

However, coming out of the quarter, Planet 13 enjoyed an impressive $7.3M in revenue in July, their highest ever recorded at the time. A significant portion of this, roughly 17%, ended up coming from curbside pickup and delivery. An eight-fold increase compared to previous months. Curbside pickup and delivery “effectively added another layer” to the business, noted Larry Scheffler, Co-CEO, during their Q2 2020 earnings call.

Even with COVID restrictions potentially strengthening (as discussed in a recent post in The Lead-Lag Report), Planet 13 has, at the very least, proved it could supply its customer base through other means.

Planet 13 hopes to mirror the success of their flagship Las Vegas location when they open another superstore in 2021 in Santa Ana, California, just minutes from Disneyland. If all goes to plan, the California location will become the second-largest dispensary globally and will be followed by at least six more locations throughout the country. The slated sites are all located in major cities that draw large numbers of tourists.

Source: Planet 13 September 2020 Corporate Presentation

Despite a potentially promising future, Planet 13 remains a speculative venture. With a market capitalization of $419M, PLNHF is barely considered a small-cap name. Moreover, its low trading volume – averaging roughly 1.5M shares trading daily, currently priced at $2.76 per share – exposes investors to liquidity risk.

At the fundamental level, Planet 13 profit metrics leave much to be desired. Despite the exciting potential for future growth, Planet 13 continues to run at a loss, with its Q2 2020 quarterly net income approaching $4M. The company must contend with the same problems others face in the cannabis industry, namely, steep regulatory expenses that pose challenging hurdles in their quest for profitability.

Planet 13’s quarterly net income. Source: YCharts

Furthermore, Planet 13 recently completed a capital raise with Canadian firms Beacon Securities Limited and Canaccord Genuity Corp., which provided PLNHF with gross proceeds of just over $15M CAD. This prompts questions about whether Planet 13 is secure in its ability to continue covering ongoing operating expenses. It also triggers concerns that continued capital raises will further dilute current shareholder ownership.

Cannabis continues to operate in a somewhat grey area, with federal and state laws conflicting with one another. Cannabis cultivation, production, and distribution are undoubtedly still in its infancy as a legitimate industry. However, companies like Planet 13 are building the foundation for what appears to be an exciting future for this increasingly less-taboo substance.

If the Las Vegas superstore is any indication, Planet 13 is serious about delivering a unique experience to its customers, so far unrivaled in this space. Solidifying the brand in other major hubs around the country, and beyond, may prove to be an extremely profitable venture for the company. That said, Planet 13 is still a potentially risky name in an often volatile and overhyped ‘pot stock’ space. Proceed with caution if considering its inclusion in your portfolio.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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