Aurora Cannabis (ACB 1.36%) is a chronic underachiever in the industry. Not only does the business struggle to generate any meaningful growth, but it also routinely disappoints investors either with poor results or relentless share offerings, diluting its existing shareholders. Rather than rolling the dice on what's one of the riskiest stocks in the sector, there's a much better option that investors should consider: Leaf Mobile (LEML.F +6.31%).
Leaf Mobile has a market cap of around $250 million and with trading volumes often well below 50,000, it isn't on many investors' radars. However, it has the potential to be a much better buy than Aurora, and it could even double in value.
Image source: Getty Images.
What does Leaf Mobile do?
One of the things that makes Leaf Mobile a unique investment in the sector is that it's not a producer, nor does it provide growers with the equipment to produce cannabis. Instead, the company is in the gaming business, providing a variety of free-to-play mobile games. Among its more popular games are cannabis-themed titles Cheech & Chong Bud Farm and Bud Farm: Idle Tycoon. Both are rated highly on the Apple store, with 4.8 stars and tens of thousands of reviews.
Leaf Mobile has other games in its portfolio, and on Feb. 5 it completed a cash-and-stock deal for East Side Games (ESG) in a reverse takeover worth 159 million Canadian dollars. A few of ESG's popular titles are based on television shows, including the Trailer Park Boys and It's Always Sunny in Philadelphia.
On March 9, Leaf Mobile also announced that it had signed a nonbinding letter of intent to acquire Truly Social Games for no more than CA$37 million. The deal could take 36 months to complete and will depend on how Truly Social performs. One of the exciting aspects of this game developer is that it is involved in augmented reality. Its Stickman AR game allows users to create characters overtop of whatever environment their phone is in, whether it's a living room, office, or outdoors.
And Leaf Mobile is not done. CEO Darcy Taylor says the company continues to look to expand geographically and into more game genres to further diversify its portfolio. The company is also looking to tap into the non-fungible token (NFT) craze. In March, it announced that it would experiment with NFTs and award them to top-performing players in certain games.
A look at the company's latest results
On May 17, Leaf Mobile released its first-quarter results of 2021 for the period ending March 31. On a pro forma basis, if its acquisition of ESG took place on Jan. 1, Leaf Mobile's revenue would have been CA$25.3 million and up 95% year over year. That's also 10% higher than the fourth quarter. Together, the companies would have generated an adjusted EBITDA profit of CA$3 million in Q1, compared with a loss of CA$1.4 million a year ago.
Adjusted EBITDA has been a target of marijuana companies and reaching breakeven on that metric remains a goal for Aurora Cannabis (it incurred a loss of CA$24 million during the first three months of 2021).
Analysts think Leaf Mobile's stock could double
Currently, Leaf Mobile's stock trades around CA$0.40 on the Toronto Stock Exchange and analysts from Eight Capital and Haywood Securities have set price targets of CA$1 and CA$0.75, respectively. But as the company continues to expand and diversify its portfolio, it wouldn't be surprising to see more bullishness for this underrated company. Its relatively small market cap combined with an aggressive growth strategy could quickly attract growth investors.
Is Leaf Mobile a buy?
Leaf Mobile is at a CA$100 million annual run rate in revenue. If it can keep that pace going, then at worst, the stock will be trading at roughly three times its sales. But given the rapid expansion the company is undertaking, it's likely that its revenue for the year will come in even higher than that. And that's a fairly low multiple of sales; the average stock in the Horizons Marijuana Life Sciences ETF trades at more than five times its revenue.
Leaf Mobile is an intriguing stock to own and it could be one of the better buys for cannabis investors. It's certainly a stock I'd buy before even considering Aurora Cannabis.
