Cannabis is becoming a vast industry -- experts expect the industry to grow from $28 billion in 2021 to $198 billion in the United States by 2028. But the cannabis industry has been tricky for investors, despite the massive upside.
Over the past year, many cannabis stocks have been beaten down, but among the rubble is a unique stock with a different business model than the growers that investors are likely familiar with. Let's dig deeper into this company, which I believe could be the big cannabis winner in 2022.
The weed technology stock
Investors have had a hard time figuring out the cannabis industry in part because of how young and fragmented it is. Cannabis is in a legal gray area right now, still illegal at the federal level, while state-level laws and regulations are different everywhere you go. It makes it harder for cannabis businesses to expand, and fragments the market, creating a lot of "mom and pop" cannabis businesses.
Image source: Getty Images.
WM Technology (MAPS 3.85%) is a technology platform that provides software solutions for both cannabis consumers and sellers. The consumer side of the business is the company's marketplace app called Weedmaps, which lets users browse, order, and have products shipped to them. The seller side is called WM Business and is a software-as-a-service product that offers an ecosystem of seller tools like online ordering, point of sale, loyalty programs, and more.
This model has proven successful in other industries, where companies like Block (formerly Square) brought technology to small businesses, and Toast has brought it to the restaurant industry. WM Technology is dedicated to the cannabis industry and builds its tools specifically for that target market.
Strong financials
WM Technology merged with a special purpose acquisition company (SPAC) over the summer to go public, which gave the company a fresh cash infusion of $80 million. It's common for young companies to be unprofitable, but WM Technology is a pleasant exception to this.
The company has reported a profit through three quarters of its 2021 fiscal year, posting $28 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on $139 million in total revenue. The business generates cash; the year-to-date cash flow from operations is $25 million.
Generating cash from the business is crucial because it reduces management's chances of issuing shares to raise money. As of third-quarter 2021, WM Technology had $106 million in cash and equivalents on its balance sheet, so there is plenty of money to continue investing for growth.
Why the stock could soar in 2022
The stock has been down more than 55% over the past year and now trades at less than $6 per share. SPAC companies go public at a starting price of $10, so the stock has declined 40% from this starting value.
The market's general attitude toward growth stocks has soured in the face of high inflation and fears over potentially rising interest rates. Most cannabis stocks have struggled, which could be due to uncertainty around the legal landscape (remember, it's still illegal at the federal level).
In 2020, WM Technology purged its marketplace of Canadian businesses that couldn't provide all their proper legal documentation. This hurt the company, bringing overall revenue growth down to 18% year over year through three quarters of 2021. Excluding this one-time event, revenue growth would be 52% year to date. Since this event has passed, growth numbers should again reflect the actual momentum of the company in future quarters.
Analysts project $258 million in revenue for 2022, which values the stock at a price-to-sales ratio of just under 3, considering its $740 million market cap. Hitting analyst estimates would put revenue growth at 36%. Investors could argue that the low P/S ratio combined with the business being profitable makes the stock attractive, despite being caught up in these temporary headwinds. As growth numbers improve in 2022 and the eventual sell-off among tech stocks subsides, WM Technology could be poised for a considerable rebound.
