Cannabis Valuations Are Lofty Now, but Could Be Cheap Long-term
May 7th, 2014
Policy, Top News
There are many different ways to value public companies, but ratio analyses using price-earnings, price-sales, and price-book metrics are among the most popular. In aggregate, the S&P 500 trades with a price-earnings ratio of 18.72x, a price-sales ratio of 1.68x, and a price-book ratio of 2.62x, which are historically lofty.
Our analysis suggests that cannabis stocks remain lofty by comparison with a weighted average 34.68x price-sales ratio, which was the only practical ratio to calculate. Looking at equities in the Marijuana Index®, we also found that nearly 40% of companies did not have sufficient sales to calculate a price-sales ratio.
GW Pharmaceuticals plc (NASDAQ: GWPH) accounted of the majority of the calculation given its overweight market capitalization that accounts for approximately a quarter of the total. The company’s price-sales ratio stands at approximately 22x, which is lower than many of its peers.
The highest price-sales multiple was that of Cannabis Sativa Inc. (OTC: CBDS) at 65,594x, while the lowest was that of SK3 Group Inc. (OTC: SKTO) at under 1x. CannaVEST Corp. (OTC: CANV) and MedBox Inc. (OTC: MDBX) – two other large components of the index – had lofty multiples of 263x and 116x, respectively.
Investors should keep in mind that higher price-sales multiples may be justified by above-average growth rates, since investors are banking on future cash flow growth rather than historical revenue. Companies investing heavily in R&D, such as biotechnology firms, typically have very low price-sales ratios before approvals.
In the end, it’s difficult to value high growth companies in cannabis, especially given the industry’s lack of history. The liberalization of cannabis laws on a national level could make these valuations cheap over the long-term, but right now, they appear higher than average as investors continue to have faith in future growth.
This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
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CFN Enterprises Inc. (OTCQB: CNFN) owns and operates CFN Media Group, the premier agency and financial media network reaching executives, entrepreneurs and consumers worldwide. Through its proprietary content creation, video library, and distribution via www.CannabisFN.com, CFN has built an extensive database of cannabis interest, assisting many of the world’s largest cannabis firms and CBD brands to build awareness and thrive. For more information, please visit www.cfnenterprisesinc.com.
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