Might This Marijuana Stock’s Valuation Be Too High?

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The pun “seeing green,” fittingly, has rarely been more applicable than to investors in the legal cannabis industry these past few years. In the trailing year, a large number of marijuana stocks, overwhelmingly Canadian, have seen doubled or tripled valuations. Over the trailing two years, some marijuana stocks valuations have even skyrocketed 1,000% or higher.

Two factors have converged to drive these drastic gains: swift sales growth paired with an increasing favor toward marijuana as the public view evolves. Research from ArcView has projected 28% growth for the North American cannabis industry through 2021. Concurrently, five major U.S. polls have all reported the same upward trend of public support for marijuana legalization – from April 2017 until recently – benefiting both direct and indirect industry players.

Small-cap marijuana stocks from Radient Technologies  (NASDAQOTH:RDDTF) turn heads with valuations above 2,900% across the trailing two years.

On the Canadian stock exchange, Radient Technologies has been on fire during this past two-year period, its marijuana stocks valuation soaring above 2,900% and with good reason; Radient Technologies has tie-ins with one of the industry giants, Aurora Cannabis  (NASDAQOTH:ACBFF). More importantly, however, is the company’s unique Microwave Assisted Processing (M.A.P.) technology. 

Radient developed its M.A.P. technology for the purpose of extraction. This was a strategic move, considering the higher price and higher margin of cannabis oils and extracts in comparison with the relatively commoditized dried product. It follows that marijuana companies diversifying product to include oils and extracts should expect margins and profits to be higher than growers who remain focused primarily on dried marijuana.

The M.A.P. technology does not end with the cannabis industry. Radient caters to the natural health, food and beverage, biofuel and personal care industries as well. For the moment, however, all of the hype around Radient correlates to cannabis extracts.

According to Radient, M.A.P. technology provides the industry with technology that clearly surpasses conventional methods of extraction. The conventional method heats a targeted compound for several hours, until it dissolves into the solvent. The desired ingredient is isolated after completion of filtration, drying and any additional processes. All in all, the conventional method is expensive and time-consuming.

In comparison to the conventional technique, M.A.P. technology allows for specific elements to be targeted and extracted with the selective deposit of microwaves into a biomass. This process, occurring in a matter of minutes, theoretically increases extract purity, all while saving time and money and reducing waste.

This new technology is exciting enough to have attracted the world’s second-largest company with marijuana stocks traded publicly, Aurora Cannabis. 

Not only is Aurora Cannabis an investor, at the close of Aurora’s most recent quarter, it finalized a Master Services Agreement (MSA) with Radient covering five years. The MSA will allow Radient to provide extraction services in Canada, the European Union and Australia, with the potential for Aurora’s extension of the services agreement an additional five years. In total, Radient may profit from an MSA with Aurora up to 10 years.

Radient’s tie-in with Aurora may prove even more useful after Aurora’s completed acquisition last week of CanniMed Therapeutics. One of Aurora’s strategies in the CanniMed acquisition and integration is a focus on processing cannabis oils, which the company plans on achieving through construction acceleration of a processing facility already in CanniMed’s building plans. Once completed, the facility will have production capacity of 720,00 liters of oil per year. Utilization of Radient’s M.A.P. technology ought to greatly assist in speeding up the process and, in turn, maximizing the facility’s extraction potential.

In addition, Radient announced late February an MSA with Bonfiy, a privately held company in Manitoba. Radient advertised extraction efficiencies as high as 98% in its press release, plus a minimum of 1,500 kilograms of biomass throughput per day. The expectation is that Radient’s reach and operations will expand in proportion with its revenue base and cash balance, enabling it to increase its handling of cannabis extracts.

While Radient’s M.A.P. technology appears cutting edge and full of potential, the steep valuation of their marijuana stocks is disconcerting.     

Even with its unique offering of M.A.P. technology and the MSAs garnered thus far, Radient Technologies’ financial statements shed a concerning light upon their marijuana stocks’ $283 million valuation (on U.S. OTC exchanges) and 2,900% increase in share price over a trailing two-year period.

Due to the company’s smaller size, Radient’s options for raising capital and adding bulk to its balance sheet are limited. In other words, dilutive financing options are its go-to. Per the company’s latest Q3 results, Radient issued an excess of 1.75 million common shares for exercised stock options, plus 39.3 million shares in relation to exercised warrants. The issuance had the dual effect of raising roughly $10.6 million at the same time as inflating the impending share count.

Radient’s extraction technology may present as marijuana stocks to invest in now, but, only for prepared investors who are aware of the risks associated with the stock’s high valuation and net losses.  

Dilution of shares presents a twofold problem. The clearest issue, to start, is that the value – and scarcity – of existing shares is reduced. Less obvious is how this dilution impacts a company’s ability to turn a meaningful profit; more outstanding shares figure into the calculation of earnings per share. What can end up happening, at least in this case, is that a high share count can mask the net loss of the company issuing the shares, deceiving unsuspecting investors. Case in point: Radient lost “only” CAD $0.06 on each share over a nine-month period in the current fiscal year (a loss that was still 50% up from the prior-year across three quarters), but the company’s net loss has quadrupled to CAD $11.28 million.

Investors need to also keep in mind the sales generated by Radient Technologies. Across three quarters, the company’s generated sales only reached $258,000 with an accumulated deficit greater than $45.2 million since inception. The Securities and Exchange Commission of Canada (SEDAR) have labeled its filings an ongoing concern. There is no guarantee that a company in possession of enough capital to fund current operations will be able to continue if losses continue unchecked.

(For smaller marijuana stocks to invest in now, read Hiding in the Weeds: 2 Lesser-Known Marijuana Stocks.)

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