Cannabis Investors: Here's the Next Big Pot Stock of 2021

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Investing in the cannabis industry early on can be a great way to set yourself up for some long-term gains. Buying shares of a newly listed marijuana company can be risky but doing so will give you an opportunity to amplify your potential returns. With market caps all over $1 billion, Ascend WellnessVerano Holdings, and WM Holding (NASDAQ:MAPS) are some of the larger marijuana companies to begin trading on major exchanges this year.

Another company Cannabis investors should watch for in the fourth quarter: Leafly. With some impressive forecasts that include revenue potentially tripling within just a few years, this well-known industry brand is likely to be one of the biggest names in the sector to go public before 2021 draws to a close.

Image source: Getty Images.

What’s so great about Leafly?

Leafly has a similar business to Weedmaps in that it helps marijuana businesses advertise and sell products. It’s not a plant-touching company, so that means it can freely trade on the Nasdaq. (Businesses that actually grow marijuana can’t trade on a major U.S. exchange due to the federal ban on pot.) Leafly has a database of more than 5,000 strains and over 1.3 million user reviews. It also strives to be a trusted name in the industry, and a source of knowledge and information on all things marijuana.

It claims that half of the shoppers on its site place orders on their first visit, while half of the retailers who use their platform place an order within a week of becoming active on Leafly. The bulk of the company’s revenue (80%) comes from retailers; the remainder originates from individual brands as it generates money through both subscriptions and advertisements.

But Leafly is just scratching the surface in terms of potential. Although it says 55% of legal cannabis retailers are on its platform, the company believes there’s even more room to grow, especially as the industry expands through legalization. From fiscal 2021 to fiscal 2024, it projects to grow at a compounded annual growth rate of 51.9%, reaching more than $150 million in annual revenue by 2024. That will be more than three times the revenue it expects to earn in 2021 — $43 million. By 2024, Leafly also expects to turn an operating profit of just under $15 million. Until then, it will remain in the red. Over the long term, it anticipates a strong gross margin of 88% and an operating profit that’s 25% of revenue.

By comparison, its rival, Weedmaps, expects to hit $440 million in revenue by 2023 and report a positive earnings before interest, taxes, depreciation and amortization (EBITDA) of $130 million. EBITDA and operating income aren’t necessarily identical, but for many businesses, they can be very comparable line items. 

Cannabis companies going the SPAC route

By now, investors have likely heard of special purpose acquisition companies (SPACs). They help take companies public through a merger, which is different from the traditional IPO approach where a company goes public on its own — a longer and more complex route. Many companies have gone public through a SPAC this year. One of the latest cannabis technology company WM Holding, better known as Weedmaps, combining with Silver Spike Acquisition Corp

https://www.businesswire.com/news/home/20210616005307/en/WM-Holding-Company-LLC-a-Leading-Technology-Platform-to-the-Cannabis-Industry-Completes-Business-Combination-With-Silver-Spike-Acquisition-Corp.

Leafly is going to go public by merging with SPAC Merida Merger Corp I. Once the transaction is complete, Merida will use Leafly’s name and “LFLY” as its ticker symbol. The companies expect the deal to close in the current quarter.

Should you invest in Leafly?

Leafly’s business looks promising — if it can live up to the numbers it is projecting. Marijuana companies need a way to advertise and promote their operations, and companies such as Weedmaps and Leafly provide opportunities for them to do so. However, Weedmaps is arguably a safer investment today since it is already profitable on an EBITDA level.

But plant-touching marijuana businesses that are growing at high rates are fairly rare. Leafly is another cannabis investment you can add to your portfolio if you want some added exposure to the sector. Both Weedmaps and Leafly possess attractive potential over the long term and can provide some impressive returns if you’re patient and willing to wait for the industry to grow and expand globally.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.