The cannabis gold rush is in full swing, and investors everywhere are eager to pan for nuggets -- but sometimes the most promising options get overlooked. With a stock price surging to the tune of 436% over the past 12 months, it's no surprise that the previously little-known Ayr Wellness (AYRW.F -2.47%) has begun to make waves in the American marijuana industry.
Notably, management has laid out a wildly ambitious (and possibly unrealistic) plan to make the company's revenue explode by more than fourfold by the end of 2022. With stats like that, investors are, understandably, drooling -- but can Ayr pull it off?
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Why it might be worth buying
As a cannabis operator, Ayr has a decently sized presence in the U.S., where it sells its wares in six states and aims to have 60 dispensaries by the end of the year. Unlike many of its competitors, Ayr Wellness is vertically integrated, so it controls everything from cannabis cultivation to its retail experience. The company competes in an equal number of medicinal and recreational-use markets, selling everything from bulk cannabis flower to vaporizers, edibles, concentrates, and pre-rolled joints.
The biggest point in favor of buying Ayr in the short term is that its revenue is surging. In the fourth quarter of 2020, its revenue grew by 48% year over year, and its FY2020 sales were up 25% in total. The company is also planning to continue its momentum throughout 2021 by acquiring a handful of regional operators in states like New Jersey while scaling up its cultivation capacity and retail footprint in key markets like Florida. These moves will likely keep profitability out of reach for the time being, but if it can keep up the tempo of growth, investors probably won't mind.
Management expects that the company will have revenue of $725 million during 2022, with anticipated adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) of around $325 million. That's quite a steep ramp up from its trailing 12-month revenue of $155.11 million. If these estimates prove accurate, shareholders who purchase the stock today might well end up rich in a couple of years. Though there's absolutely no guarantee of striking gold, it may be reason enough to speculatively purchase a few shares of Ayr in the context of a well-diversified portfolio.
Why it might be better to wait
That said, as tempting as this stock's growth trajectory might be, conservative investors will want to steer clear. In short, the company's expansion plans may be larger than it can afford without taking out new debt or issuing new shares to raise cash.
For all of 2020, Ayr Wellness reported total expenses of $135.49 million, and it currently has around $127 million in cash on hand. Remember, it isn't anywhere near profitable at the moment, so something has to give between now and 2022 for things to proceed at their current pace and scale. In other words, people who invest today might see their equity diluted over the next year.
One other item that potential investors need to be aware of is that management has opted not to provide any performance outlook for 2021, even though it has provided one for 2022. This means that new investors have little clue about how the company will look or act as it navigates from where it is today to the anticipated revenue bonanza of 2022.
The verdict
While I'd love to be proven wrong, I'm skeptical that Ayr will grow as rapidly as it wants to between now and the end of 2022. In the meantime, it'll face cash constraints on growth. In the long term, it'll likely face the cannabis industry's ubiquitous bugbear of overbuilt cultivation capacity and insufficient profitability (at least, without making considerable accounting adjustments based on the prevailing price of cannabis).
With that being said, having two or three quarterly earnings reports from 2021 that show the company is moving in the right direction would do a lot to assuage my concerns. So, if you're willing to make a highly speculative purchase, you could buy the stock now, before there's solid evidence that Ayr will succeed in its ambitions. Still, I think it's more prudent to wait six months and see where things are, even if it means missing out on some of the stock's potential gains this year.
