Marijuana stocks are not without their risks. Most are tiny, unprofitable penny stocks that most investors would be best off avoiding.
However, if you're looking to invest in a legitimate pure-play marijuana business, GW Pharmaceuticals (GWPH) is arguably the best choice available. What makes GW Pharmaceuticals such a compelling option for investors? These five charts give a few clues.
Image source: Getty Images.
Stock performance
Nothing shows how hot GW Pharmaceuticals has been among investors better than its stock performance over the last few years. Share prices have soared as the marijuana drug market has heated up and as GW's clinical program has advanced.
The above chart, however, also points to a less exciting fact about GW Pharmaceuticals' stock: its volatility. Most investors love when stocks have a low beta, which is a measure of a stock's volatility in relation to the broader market. GW's beta is 2.58, reflecting much more volatile price swings than the market's average.
Revenue
You might think that rising revenue helped power GW Pharmaceuticals shares to their dizzying gains. That's not the case.
GWPH Revenue (Quarterly) data by YCharts
Sales for GW's first product, Sativex, are declining. Most of the company's revenue, though, still comes from research and development fees paid by partners. That collaboration revenue is also decreasing.
Net losses
With revenue dropping, it only makes sense that GW Pharmaceuticals' bottom line would suffer. It is -- and the downward trajectory is worse than that of the company's top line.
GWPH Net Income (Quarterly) data by YCharts
The primary factor behind GW Pharmaceuticals' net losses piling up is the company's higher research and development costs. From 2015 to 2016, R&D costs increased by 30%.
Pipeline
However, those R&D costs are increasing for a good reason. GW Pharmaceuticals has plenty of pipeline activity going on.
GW Pharmaceuticals pipeline. Image source: GW Pharmaceuticals.
Epidiolex represents the future for GW Pharmaceuticals. This oral cannabinoid is in multiple clinical trials. If Epidiolex wins regulatory approval, the drug could reach peak annual sales of perhaps up to $3 billion.
The most advanced studies for Epidiolex target Dravet syndrome, a rare genetic disease that occurs in infants, and Lennox-Gastaut syndrome (LGS), a rare type of epilepsy. GW isn't the only company interested in those indications, however.
Insys Therapeutics (INSY) has also announced plans to get approval for one of its marijuana-based drugs to treat Dravet syndrome and LGS. At this point, however, GW has the first-mover advantage.
Cash
With losses mounting and a busy pipeline, having enough cash is critical for GW Pharmaceuticals. As of the end of 2016, the company appeared to be in pretty good shape.
GWPH Cash and Equivalents (Quarterly) data by YCharts
GW's cash stockpile was bolstered in July, when the company issued a public stock offering that netted an additional $273.1 million. GW Pharmaceuticals should be able to fund operations and its clinical programs well into the future.
Looking ahead
The latter two charts -- pipeline and cash -- are probably most important to GW Pharmaceuticals right now. GW's future success rides on Epidiolex and the cash needed to wrap up clinical studies and commercialize the drug.
If Epidiolex delivers as GW hopes it will, the revenue and earnings pictures should improve significantly. Even better for investors, so should GW Pharmaceuticals' already-impressive stock chart. If you can accept the risks associated with investing in this nascent industry, GW Pharmaceuticals is my favorite option for a pure-play marijuana stock.
