Marijuana stocks have been a popular trend in the investing world for several years now, but I've avoided the space. Some of the publicly traded cannabis companies were extremely speculative, early-stage businesses, and others simply didn't strike me as having good business models.
However, after I watched the company for some time, dispensary operator Planet 13 Holdings (PLNH) is now a part of my stock portfolio. Here's why I finally decided to pull the trigger on this particular marijuana stock, and why I'm excited for the next few years.
Image source: Planet 13 Holdings.
Planet 13 Holdings in a nutshell
Planet 13 Holdings operates a marijuana dispensary in Las Vegas, but there's so much more to the story. In markets where recreational use of marijuana is legal, dispensaries are everywhere. And most aren't terribly unique.
On the other hand, Planet 13 operates a "Cannabis Superstore." Its Las Vegas dispensary is more of an entertainment complex, complete with a coffee shop, restaurant, in-house production facility (which the public can observe), and an event space. In all, the location is the largest dispensary in the world, and provides an experience you simply can't get anywhere else. And the fact that it's the closest dispensary to the Las Vegas Strip doesn't hurt.
In 2019, Planet 13's dispensary had over 1 million visitors and generated $63 million in revenue. And this could just be a starting point. The facility was dramatically expanded recently, and new amenities continue to be added. The company is also building a 24/7 home-delivery business to complement its in-house sales, and the service has been expanded greatly during the COVID-19 pandemic.
Future plans
Here's the main point. While Planet 13's Vegas dispensary is unlike anything else in the world, and is a fantastic business all by itself, I didn't invest in the company because of one marijuana dispensary.
The main reason I invested is because Planet 13's model and brand are scalable and the concept of a cannabis "superstore" is a nearly untapped business opportunity in the United States. And to say that Planet 13 has ambitious expansion plans would be an understatement.
The company plans to expand to its first location outside of Nevada (in Santa Ana, California) later in 2020 and has a list of "tier-one" markets on its radar. Obviously, the ultimate expansion potential depends on state-by-state legalization, but the company wants to be in at least eight major U.S. markets within five years. In a recent presentation, management said that "If a city is affluent enough to support a major sports team, Planet 13 is interested in opening a premium cannabis store."
Obviously, we aren't going to see a cannabis superstore in New York City or Chicago just yet, or in other locations where recreational marijuana use isn't yet legal. But there's a clear trend toward legalization nationwide, and this should provide long-tailed opportunities for Planet 13 to be the first business of its kind in new markets as they become viable expansion routes.
Why did I pull the trigger?
In a nutshell, Planet 13 has taken the concept of a marijuana dispensary and turned it into a destination. And it's a destination that could be replicated many times in markets throughout the United States. Its Las Vegas Superstore has planted the seeds for its brand, but Planet 13 hasn't even begun to scratch the surface of its long-term potential.
Planet 13's revenue nearly doubled from 2018 to 2019, and while the company isn't profitable yet, that's not a concern while it's in rapid growth mode. Plus, the net loss in 2019 was about $2.6 million and the company has about $12 million in net cash on its balance sheet, so it has quite a bit of runway.
I don't expect a smooth ride
At the moment, Planet 13 Holdings remains a small, over-the-counter stock with a market cap of just over $200 million. And for the time being, its ability to profitably scale its model is unproven.
As with any micro-cap company, I'd only suggest investing money you can afford to lose in Planet 13, and that's exactly what I did. My initial investment is less than 0.3% of my portfolio value. As the business scales, I may end up adding, but for now it's a small investment.
To be perfectly clear, Planet 13 Holdings is a high-risk investment with a lot of reward potential if things go well. Its business model is compelling enough to attract someone like me who has completely avoided marijuana stocks until this point, and while I think it has multibagger potential over the coming years, I have no delusions that it's going to be a smooth ride.
