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This Under-the-Radar Cannabis Partnership Is a Bigger Deal Than You Realize

By Sean Williams – Aug 15, 2019 at 6:06AM

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A leading marijuana grower and accessories retailer just forged an exclusive partnership in the United States.

While there are a number of high-growth industries for investors to choose from, it's the "green rush" of marijuana that continues to attract the bulk of the attention on Wall Street. With double-digit growth potential per year over the next decade and some Wall Street firms calling for as much as $200 billion in annual worldwide sales, it's easy to see how cannabis could be the leading growth industry in the years to come.

But make no mistake about it: The United States is the one market around the globe where the marijuana industry is focused. Despite Canada becoming the first country to legalize recreational marijuana, peak Canadian weed sales will pale in comparison to the U.S., which investment bank Stifel believes could reach $100 billion annually in a decade, assuming federal legalization of the drug. It's for this reason that pot stocks have been so aggressively investing in the U.S. market, when available.

Last week, we witnessed one of these deals take place.

Two businessmen in suits shaking hands, as if in agreement.

Image source: Getty Images.

It's all about cannabis derivatives

On Thursday, Aug. 8, the largest marijuana stock in the world by market cap, Canopy Growth (CGC -3.52%), continued to make its push into the U.S. market while tiptoeing around direct contact with cannabis plants -- which is still illegal at the federal level in the U.S. -- by striking a deal with Greenlane Holdings (GNLN -3.39%). While this partnership largely flew under the radar considering the numerous acquisitions Canopy has made, as well as its massive global reach, it's a bigger deal than investors likely realize.

Greenlane, which is one of only three cannabis stocks to debut on a major U.S. exchange via the initial public offering process, is a paraphernalia giant. The company's more than 5,000 stock-keeping units (SKUs) have access to a network of more than 11,000 retail stores throughout North America, with a core focus on vaporizer products. And if you've been paying attention to forecasts in Canada, vapes are projected to be the leading source of derivative sales, once these new pot products begin hitting dispensary shelves in about four months. 

The excitement surrounding cannabis accessories is really a story about margins. Although dried cannabis flower has long been the "face" of the marijuana movement, it's an easily commoditized and oversupplied product. Instead, a younger generation of cannabis users have made it clear that alternative consumption options, such as vapes, are preferred. These derivatives and the accessories needed for their consumption typically have much juicier margins than dried cannabis flower, making them something of a portfolio staple for most marijuana stocks.

The Volcano tabletop vaporizer on a bar rail.

The Volcano tabletop vaporizer. Image source: Storz & Bickel.

Greenlane's success has been built upon its multiple early stage partnerships, especially with regard to vaporizers. Since Greenlane's inception in 2005, it's been working with Storz & Bickel, which you might be familiar with for its Volcano tabletop vaporizer or its handheld Crafty and Mighty devices. Sure, it may not have the same notoriety as Juul, but Storz & Bickel vaporizer products are near the top of the pecking order in terms of vaporizer brands.

Canopy Growth further entrenches itself in the U.S. market

In December, Canopy Growth announced that it would acquire Storz & Bickel for about 204 million Canadian dollars. Storz & Bickel had, at the time, 17 intellectual property patents for vaporizer technology and had exported its vaporizers to more than 50 countries worldwide since its inception in 1997. This gave Canopy a way to beef up its existing vaporizer patent portfolio, as well as focus on its global ambitions. 

But more importantly, Storz & Bickel also had a partnership in place since January 2018 to sell its vaporizer products in the U.S. exclusively through Greenlane. With Canopy acquiring Storz & Bickel, it left this exclusive partnership up in the air. However, with the duo announcing a new U.S.-exclusive partnership for Storz & Bickel vaporizers, Canopy continues the long-developed relationship between both businesses, as well as gives itself access to more than 11,000 North American retail doors. 

A young bearded man with sunglasses on exhaling vape smoke while outside.

Image source: Getty Images.

Remember, Canopy Growth was awarded a hemp processing license in New York State in January, which will allow the cannabis giant to construct a processing facility on U.S. soil, as well as potentially offer hemp-derived cannabidiol products. This is all part of Canopy's plan to lay the infrastructure on U.S. soil that would be needed to thrive if and when the U.S. government ever changes its tune on marijuana.

Furthermore, don't overlook just how important Storz & Bickel was to Canopy's fiscal fourth-quarter results. Although Canopy provides extraction services and clinical research, the addition of Storz & Bickel helped to boost "Other" segment sales to 24.2 million Canadian dollars. That's more than a quarter of the company's net revenue in the fiscal fourth quarter. In other words, cannabis accessories represent a meaningful source of revenue and growth for the largest marijuana stock in the world. 

The signing of this exclusive partnership with Greenlane may not seem like a big deal on the surface. But make no mistake about it -- it's a significant win-win for Canopy and Greenlane, especially with the arrow pointing toward an eventual legalization of cannabis in the United States.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.74 (-3.52%) $0.10
Greenlane Holdings, Inc. Stock Quote
Greenlane Holdings, Inc.
GNLN
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