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This Could Be the Next Big Pot Stock

By David Jagielski – Updated Jun 1, 2020 at 1:56PM

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A more effective way of delivering CBD could unlock significant growth opportunities for this unknown small-cap.

Pot stocks are a dime a dozen these days. There is no shortage of companies out there touting that their cannabis is higher quality than their peers. For investors, it makes investing in a cannabis company all the more difficult, especially when it comes to finding up-and-coming stocks.

Being able to tell which stock is a pretender and which one is the real deal isn't an easy task, but this little-known pot stock has a competitive advantage over its peers.

A biotech company that's turned to cannabis

Amyris (AMRS 2.10%) is in the business of health and wellness and purports to produce pure ingredients for its customers. In March 2019, the company announced that it signed an agreement worth potentially $300 million with Lavvan, a then-recently formed company. The companies agreed to work together in bringing cannabinoid products to market, with Amyris focusing on the research and development part of the process.

Cannabis hemp oil.

Image source: Getty Images.

In 2019, Amyris recorded revenue of $18.3 million related to the deal. It represented a modest 12% of the company's total sales for the year but it's an exciting growth opportunity for investors. There's a profit-sharing component of the agreement that could see Amyris collect payments for 20 years once the cannabinoid products are commercialized.

Why there could be an even bigger opportunity for Amyris

The agreement that Amyris has in place with Lavvan is an attractive one, but that could just be the start of its opportunities in the industry. In March, Amyris unveiled the results of a study conducted by the Cosmos Technical Center. The study found that Amyris' method for delivering cannabidiol (CBD) through sugarcane squalane was more effective than hemp seed oil and other ways of carrying CBD. It was able to penetrate the skin at a much higher level. The company's Neossance Squalane product was able to deliver 10 to 40 times more CBD to the skin compared to other oils.

Hemp seed oil is popular in the cannabis industry. A quicker and more impactful way to deliver CBD could open up many opportunities for Amyris in the CBD market. The company has said it's applied for a patent to protect its methodology of delivering CBD and other cannabinoids through the use of squalane. Amyris stated that it "believes it will be the first company to provide highly pure and efficacious CBD from this technology at commercial scale."

If the company can secure a patent on a superior method for delivering CBD, it could be a key differentiator. Not only will that help the company meet milestones related to its agreement with Lavvan, but it could lead to other opportunities within the cannabis industry as well. Being able to produce high-quality cannabis products is one way a company can differentiate itself from its peers and justify a higher price and better margins in the process.

Does this make Amyris a buy?

Cannabis could be what sets Amyris' stock on fire. A patent to produce high-quality CBD could help the company land deals with other companies in the cannabis industry.

The California-based company is still in its early growth stages. On May 8, Amyris released its first-quarter results which saw revenue growth of 103% from the prior-year period. In 2019, its top line grew by 140%. Despite the challenges and uncertainty that COVID-19 presents for the company and its customers, Amyris still expects to see sales for 2020 to rise by 44%, with recurring sales expected to increase by 80%. The challenge for the company remains the bottom line, where Amyris has been in the red in all but one of its past 10 quarters.

Before investing in Amyris, investors should also take into account the SEC's previous investigations into the company and Amyris' failure to come through on promises in the past. While the company has high hopes for the future, that doesn't mean they'll come to fruition. And until its squalane delivery method can deliver proven results, investors will be taking on some risk if they buy shares of the company.

Currently, the stock trades at a modest 2.5 times its revenue and it could be a bargain buy for long-term cannabis investors. Year to date, shares of Amyris are up nearly 40% while the S&P 500 is down by 6%.

David Jagielski 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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