Valens GroWorks Corp: $2.34 Pot Stock Could Be an Opportunity

Valens Groworks Corp This $2.34 Pot Stock Could Be an Opportunity
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1 Pot Stock to Think About

Given what’s been going on in the markets lately, few things scare investors more than a falling pot stock. But in the case of Valens GroWorks Corp (OTCMKTS:VGWCF, CVE:VGW), which tumbled 2.8% on the day I’m writing this article, patient investors might see big rewards in the long run.

Let me explain.

In the past several weeks, uncertainty has been a major theme for the U.S. stock market. Unsurprisingly, as market participants enter their “risk-off” mode, there has been a tendency to first sell the most volatile tickers.

Pot stocks happen to be some of the most volatile names in the market: the cannabis industry saw huge rallies in the past two years, but momentum in marijuana stocks slowed down in the second quarter of 2019. And now, shares of many cannabis companies are experiencing huge sell-offs.

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Valens GroWorks Corp is a vertically integrated pot company headquartered in Kelowna, British Columbia, Canada. Like many marijuana companies, Valens GroWorks stock trades on the TSX Venture Exchange. Its ticker symbol there is “VGW.” U.S. investors interested in this pot stock can find it over the counter under the symbol “VGWCF.”

Looking at the VGWCF stock chart, we can see that it has been following the momentum of the pot industry. That is, the stock had a strong rally earlier this year, but pared quite a bit of those gains recently.

Trading at $2.34 per share over the counter, Valens GroWorks is one of the cheaper pot stocks in terms of nominal share price.

Valens GroWorks Corp (OTCMKTS:VGWCF) Stock Chart

Chart courtesy of StockCharts.com

But there’s nothing cheap about the company’s business model. In fact, Valens GroWorks Corp is all about earning high margins.

You see, Valens GroWorks is not just a pot producer. Instead, it provides a wide range of services for companies in the cannabis industry.

These services include CO2, ethanol, hydrocarbon, solvent-less and terpene extraction, analytical testing, formulation, and white-label product development.

Basically, Valens GroWorks wants to be the partner of choice for leading Canadian and international cannabis brands. And while it is a low-priced pot stock, VGWCF has already partnered with some high-profile names in the business.

Valens GroWorks now provides extractions services for Canopy Growth Corp (NYSE:CGC), Tilray Inc (NASDAQ:TLRY), OrganiGram Holdings Inc (NASDAQ:OGI), Hexo Corp (NYSE:HEXO), Green Organic Dutchman Holdings Ltd (OTCMKTS:TGODF, TSE:TGOD), just to name a few.

According to the company’s latest investor presentation, Valens GroWorks is basically extracting for over CA$49.0 billion worth of market capitalization. (Source: “Corporate Presentation August 2019,” Valens GroWorks Corp, last accessed August 27, 2019.)

It’s no secret that selling oil-based cannabis products—which require extraction—tends to give companies a higher profit margin than selling dried flower. And it just so happens that the market has been moving toward these higher-margin products.

Back in 2016, the U.S. cannabis market was made up of 71% flower-based products and 29% oil-based products. By 2018, the share of oil-based products in that market has increased to 47%. (Source: Ibid.)

By focusing on extraction, Valens GroWorks has built a lucrative business.

According to its most recent earnings report, the company realized a gross margin of 58% of revenue in the second quarter of 2019, marking a substantial improvement from the 38.3% achieved in the first quarter. (Source: “Valens Reports Record $8.8 Million in Revenue and Adjusted EBITDA of $2.0 Million in the Second Quarter of Fiscal 2019,” Valens GroWorks Corp, July 15, 2019.)

Judging by Valens GroWorks stock’s lackluster price performance after that earnings report, you might think the gross margin improvement was the only highlight of that quarter.

But that wasn’t really the case. The blunt reality is that the bears can say what they want, but they cannot deny that Valens GroWorks has been firing on all cylinders.

In the second quarter of 2019, the company generated CA$8.8 million of revenue, representing a staggering 296% increase sequentially.

During the same quarter, Valens GroWorks Corp. processed 8,547 kilograms (18,843 pounds) of dried cannabis and hemp biomass, marking a 376% increase from the 1,796 kilograms (3,960 pounds) processed in the first quarter.

Note that, while the third-quarter results are not released yet, there’s a good chance the numbers will cheer up investors. This is because, in just the first 45 days of the third quarter, Valens already processed 7,348 kilograms (16,200 pounds) of biomass.

Analyst Take

As it stands, Valens GroWorks Corp is the largest third-party cannabis extraction company in Canada, with an annual capacity of 425,000 kilograms (936,965 pounds) of dried cannabis and hemp biomass.

The company has also recently received significant interest from its industry partners for white-label product development and manufacturing for vape cartridges, gel capsules, and beverages.

As the demand for cannabis derivatives continues to increase, Valens will likely keep churning out impressive growth rates. In the years ahead, I wouldn’t be surprised to see VGWCF stock trading at a much higher share price.