© Reuters. WM Technology: “Selling Shovels” to Marijuana Industry
WM Technology, Inc. (MAPS) is a very interesting company within the marijuana industry. Unlike other players in the space, the company doesn’t actually touch any plants. Instead, it provides SaaS subscription offerings to retailers and brands in the United States and Canadian cannabis markets. It also operates the Weedmaps listings marketplace, which provides consumers with information regarding cannabis retailers and brands.
WM Technology is growing fast and earns a profit, which is a rarity within the cannabis industry. In fact, according to management, the company has been profitable since it was founded, back in 2008.
Furthermore, it boasts 95.6% gross margins and it’s cash flow positive. This allows WM Technology to reinvest more as a percentage of revenue into growth, while not having to rely on outside capital. As a result, we are bullish on WM Technology. (See WM Technology stock charts on TipRanks)
WM Technology’s target market is the marijuana industry. The industry is expected to see a substantial CAGR of 13.9% from 2021 to 2026. In 2020, the industry was estimated to be worth USD 22.9 billion. The high growth from the overall industry should act as significant tailwinds for the company.
This growth can be attributed to a few things. To begin with, more states in the U.S. continue to legalize both medicinal and recreational marijuana use. As more states legalize, the total serviceable market will continue to grow. Furthermore, the states that have legalized marijuana are under-served in terms of retail licenses. Thus, most of the market still operates on the illegal side. This provides a large runway for growth as new licenses are issued.
Since WM Technology is neither a dispensary or producer, it has the advantage of not having to compete with the vast number of marijuana companies selling the physical product. WM Technology is the specialized software provider software provider to these marijuana companies.
Given that it was founded in 2008, WM also has a strong first mover advantage. Think of the marijuana industry as the 1849 California Gold Rush, where few prospectors struck it rich. Most of the people who made money back then were those who sold shovels, supplies and services to the prospectors. WM Technology is the equivalent of “selling shovels” to the marijuana industry. The benefit of “selling shovels” is clearly demonstrated on the financial statements.
When looking at the company’s U.S. operations, we can see strong growth in users and per-user spending. In the first quarter of 2020, the company had 3,238 clients paying average monthly revenues of $2,681. In the second quarter of 2021, these figures grew to 4,221 clients paying an average of $3,706 each. Clearly, clients find the services very useful, and they are willing to increase their spending.
WM Technologies has 18 regulatory risks. At any time, laws could change to reverse the progress made within the industry, materially impacting retailers. In such a scenario, WM Technologies would be materially impacted as well, because it would lose customers who could longer operate.
In addition, some marijuana retailers are sketchy characters who do not operate in full compliance. This has already been the case for WM Technologies, as it has had to discontinue providing services to companies who failed to provide valid license information. As a result, the company lost its entire revenue stream from Canada. Nonetheless, the growth from the U.S. operations picked up the slack and more than made up for the lost revenue.
Wall Street’s Take
Turning to Wall Street, WM Technologies has a Strong Buy consensus rating, based on six Buys assigned in the past three months. The average WM Technologies price target of $18.75 implies 26.6% upside potential.
WM Technologies is a rare opportunity to “sell shovels” to the fast-growing marijuana industry. Given how volatile and unprofitable almost all other companies in the space have been so far, it’s nice to see a company that has been consistently profitable since inception. Although the company does face regulatory risks, we believe the overall growth trends and catalysts greatly outweigh these risks.
Disclosure: At the time of publication, Stock Bros Research had a long position in WM Technologies.
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