Marijuana Stock Charlotte’s Web Looks Appealing at Current Levels

Shortly after discussing the appeal in owning Charlotte’s Web Holdings (CWBHF), the company announced a secondary offering from selling shareholders. The offering is concerning since the company is still in the early stages of development, but the stock price is a better deal now after taking the hit from this secondary.

Big Secondary

After disclosing that the company has an interesting position in the CBD pet market forecast to surge to a market size of $1.16 billion by 2022, Charlotte’s Web announced that selling shareholders were unloading 7 million shares at a price of C$20.00. The deal is ~$15 or about $10 below the recent highs.

The selling shareholders have another 15% allotted to the deal that will in total raise C$161 million for early investors. The diluted share count is around 106 million.

The stock now has a market valuation down at $1.5 billion so the deal amounts to nearly 10% of the outstanding shares. The amount is very sizable, but the shareholders are now less of a risk to unload more shares with the hemp-derived CBD market set to soar in the next 5 years.

 Source: Charlotte’s Web presentation

Preliminary Q1

Along with the secondary offering, Charlotte’s Web released preliminary Q1 numbers. The company forecasts revenues of $21 to $22 million with adjusted EBITDA of $4.0 to $4.5 million on gross margins of up to 75%.

The revenues are right inline with Q4 revenues so the lack of growth might trouble some investors. Last year, Charlotte’s Web saw the biggest jump in sequential revenues during Q2 and Q4.

The passing of the Farm Bill near the start of the quarter likely caused the market to delay some decisions to figure out the best way to take advantage of the new CBD market dynamics. The company forecasts a return to the historical EBITDA norms in the 30% to 35% range while most cannabis companies don’t even have historical norms. During Q1, Charlotte’s Web saw EBITDA margins dip to 20%.

The CBD wellness company did provide some tepid forecasts for the rest of 2019. The projection for revenues of $120 to $170 million for the year is very conservative considering March sells hit a record of $8 million for an annualized rate of $96 million and a quarterly rate of $24 million.

Charlotte’s Web has now topped 6,000 retail stores in May with a 50% increase in retail locations just this year alone. Those additional retail doors will contribute to significant revenue growth in 2019. More importantly than where the company reaches annual sales this year is that the run rate entering 2020 should be significantly higher.

The company is doubling the planting of hemp acres in 2019 to 300 acres. Charlotte’s Web already boosted production 10 fold last year and similar production this year would bring the 2019 production to 20 fold the level of 2017.  The company remains positioned with plenty of supplies of hemp-derived CBD while other players are just working on how to enter the industry with an intent of ramping up production next year.