Across the country, multi-state operators (MSOs) are securing licenses at breakneck speed as they jockey for position in the growing number of states that have legalized medical- and recreational-use cannabis. Many, such as big players Green Thumb Industries and Curaleaf, are obtaining those licenses through M&A deals, and opening dispensaries at relatively rapid paces.
But one player in the cannabis market is taking a different approach -- focusing on a small number of superstores that offer both cannabis and entertainment value for customers. Planet 13 Holdings (PLNH.F 6.20%) opened the first-of-its-kind cannabis superstore in Las Vegas in 2018. Now, it's looking toward new markets where it can expand that strategy and potentially provide a big win for investors.
Following in the footsteps of success
Planet 13 recently announced it had obtained a vertically integrated license through its $55 million acquisition of Harvest Health & Recreation in Florida. This will pave the way for it to open superstores in Orlando and Miami that are similar to its existing locations in Las Vegas and Orange County, California.
This acquisition was a bit unusual in that the company did not acquire any assets or liabilities. Instead, the transaction was focused on the license provided by the Florida Department of Health to Harvest Health to operate as a medical marijuana treatment center.
In the second quarter, Planet 13's 40,000-square-foot Las Vegas complex contributed $24 million of the company's record $33 million in revenue -- up 38% from the first quarter and up 205% year over year. The store's success was supported by an average of 4,500 customers per day whose purchases were processed at more than 43 cash registers. In September, the company expanded it to 85 registers. The ultimate plan for the site at its full build-out is for a 112,000-square-foot store with up to 150 registers.
Planet 13 also took its expansion plan across the mountains to Orange County, California back in July, opening a 55,000-square-foot superstore within minutes of popular beaches and only eight miles from Disneyland. Now, before you discount the idea of Disneyland playing an important role in attracting potential cannabis customers because of its focus on entertainment for children, it's worth pointing out that a 2017 report from the Census Bureau found that the 18- to 29-year-old demographic makes up the largest share of theme park visitors. Guess what the largest group of marijuana smokers is in the U.S., per Statista in 2019? 18- to 29-year-olds.
The recreational-use question
The company's plan in Florida is to start by opening smaller medical dispensaries. Once it's established in the market, it hopes to transition into the adult-use recreational sphere -- allowing for short-term and long-term growth, with the ultimate intention of building superstores in the densely populated and tourist-luring cities of Miami and Orlando.
This coveted market features 20 million residents and receives more than 130 million visitors a year, but it also comes with competition -- 22 companies hold vertically integrated licenses in the state, and 371 dispensaries are operating there. Planet 13 hopes to stand out from the crowd with its superstores.
But the other major obstacle Planet 13 faces in Florida is that cannabis is not yet legal for recreational use there. It's not that the demand is lacking -- according to BDS Analytics, Florida is projected to be the third-largest cannabis market in the U.S. by 2026. But the path to adult-use legalization in the state is likely to be torturous. Florida's Republican legislators have routinely blocked such bills, and to get a measure on the ballot so that the voters could make the change themselves, backers would have to collect hundreds of thousands of signatures during a relatively brief time window, and the state supreme court would also have to approve the ballot question in advance.
Is Planet 13 a bargain?
Beacon Securities analyst Doug Cooper maintains a buy rating on Planet 13 stock, but recently cut his target price from $9.32 to $7.70 based on lower than anticipated sales at the California superstore. This led to an 8% lower revenue projection for 2021 and a 5% cut in outlook for 2022's revenue. However, it should be noted that these lower projections still equate to average revenue increases of 73% for 2021 and 2022, which should be music to the ears of long-term investors.
The combination of the recent broad decline in cannabis stocks and Cooper's target price reduction has overshadowed Planet 13's record second-quarter revenue. The stock price has plunged from a 52-week high of $8.67 to close Tuesday trading at $3.77. But with this decline, long-term investors have reason to be excited. Cooper's buy rating and a target price of $7.70 (slightly above the average analyst target of $7.17) suggests investors who get in now could reap a 104% gain. And if Florida's recreational-use market is opened, Planet 13 could deliver much higher gains long term.