The Valens Company (OTCMKTS:VLNS) is one of several Canadian cannabis stocks currently receiving attention from investors. Since the opening of Canada’s legal cannabis market, investors have piled into companies planning to meet consumer demand in the country. Here’s what you need to know about VLNCF stock and whether it’s a buy or sell at the moment.
Note: VLNCF is based in Canada. All dollar figures are listed in Canadian dollars unless otherwise specified.
What Does the Valens Company Do? The Valens Company is a biotechnology firm that specializes in the manufacturing and processing of cannabis products. The company provides services to international cannabis brands and develops white-label products. It is also engaged in the testing and analysis of cannabis products.
Who Owns Valens? As a publicly traded company, Valens is owned by its shareholders. The company was co-founded by Tyler Robson, who now acts as CEO and Chairman of the Board. Robson holds 3.2 million shares, likely making him the company’s largest individual shareholder.
The largest institutional shareholder in Valens appears to be Sundial Growers (SNDL), which is known to hold 18.67 million shares. Sundial’s stake represents 10 percent of the total shares in the company.
Valens Breaks Into US Market: Grows Sales
According to its earnings call for Q3 2021, The Valens Company brought in net revenues of $21 million. This represents a 15.8 percent increase over the same period in the previous year.
Product sales drove much of this growth. The company increased its product sales by $4.5 million, or 29.7 percent. The company also broke into the US CBD market for the first time during the quarter and generated $4.7 million in revenue from that income stream.
In Q3, this stock reported losses of $0.24 per share. This was a substantial underperformance against analyst expectations.
The consensus estimate suggested the stock would lose only $0.12 per share, only half of the true losses. Q3 was the fourth consecutive quarter in which VLNS shares lost more than expected.
Rising Margins Bode Well For The Future
Valens appears to have some reasonably good news in its financial reports. In Q3, the company’s gross margin was 26.8 percent, up from 22 percent in Q2. Growth also stands out as a bright spot.
Q3 saw a growth of 76.5 percent in retail level sales, as well as a 20 percent growth in total net sales within Canada. As noted several times throughout its earnings call, growth in multiple markets remains the primary focus of the management team at The Valens Company.
Profitability remains elusive for Valens, but the company believes it is entering 2022 in a strong position to achieve both ongoing growth and eventual profit. The company’s margins seem to put it on a good track for profits in the future. The move into the US CBD market, likewise, could prove to be a significantly profitable business for Valens.
Is Valens a Good Buy?
Valens stock has two Buy ratings and one Hold. The average target price for the stock is $3.92. This represents a 120 percent increase from its current price of $1.78. If the stock reaches this target, it would clearly be a standout performer over the next 12 months.
These ratings seem to be predicated on Valens’ strong growth in both Canadian retail and the US CBD market. As the company continues to expand, both of these markets should offer considerable opportunities for future growth and revenue.
Another advantage Valens has is not fully reflected in its Q3 data. In November 2021, the company acquired Citizen Stash Cannabis Corp. This acquisition strengthens Valens’ position in the recreational cannabis market and gives it access to a host of new plant strains for sale. Such strategic acquisitions could work in Valens’ favor as it continues to build its business in Canada and abroad.
It’s important to note, however, that the pool of analyst ratings is quite shallow. With only three analysts rating VLNCF, there’s limited room for more negative ratings to show. Positive ratings, meanwhile, can show disproportionately optimistic prices. As a result, investors should likely be skeptical of the accuracy of target prices until more analysts release ratings.
A discounted cash flow forecast analysis pegs the fair market value for Valens substantially higher too.
Will Acquisitions Prove To Be A Strategic Mistake?
VLNCF’s biggest risk factor likely comes from its recently consistent losses. While losses are common enough in the stock market, the fact that the company continues to underperform analyst expectations in this area raises serious concerns. If this trend continues into 2022, there’s a good chance that the stock could substantially underperform the price targets discussed above.
The company’s pursuit of acquisitions may also be a problem. Although the company could benefit from expansion, it could also find itself overleveraged if growth proves slower than expected.
Valens is also operating in a market that experts increasingly believe to be oversaturated. Canada has allowed legal cannabis for the past three years, but the industry has consistently performed below investor expectations.
In large part, this is believed to be due to consistent supply chain issues, stringent regulations and brand saturation at the retail level. A shakeout of businesses in this industry could occur in the coming years, leaving smaller companies like Valens vulnerable.
Is VLNCF a Buy or a Sell?
There’s no doubt that The Valens Company has some positive factors. A reasonably low share price, strong growth and decent margins all make the company seem fairly attractive. Although there are only three of them, the analyst ratings that currently exist for the company seem to confirm this view.
To be sure, there are opportunities in the emerging market for cannabis. Projections show the global market for legal cannabis growing at a compounded annual growth rate of 23.4 percent between now and 2028.
By those projections, the global market size by that year would reach over $111 billion (USD). The companies that best capitalize on this growth will likely do quite well and reap large profits as more consumers begin to access legalized cannabis products.
The Valens Company’s problems, however, could outweigh its benefits. Returning outsized losses on a consistent basis doesn’t bode well for the fledgling company. Likewise, its somewhat aggressive program of acquisitions could become a problem further down the road.
The biggest problem, however, is the Canadian cannabis market itself. Despite continued investor optimism, the country’s heavy regulation and difficulties in the supply chain have kept the industry from performing to its full potential.
Growing exposure to the US market could help The Valens Company escape the constraints of its home country. Since full recreational legalization at the federal level continues to be elusive in the US, though, even this market poses certain issues.
Overall, VLNCF could be a buy for very risk-tolerant investors looking for future returns from the more profitable US cannabis market. With a low share price, good growth prospects and decent analyst price target, the stock could produce good returns in the coming years. If you’re a more conservative investor, though, the potential benefits of The Valens Company don’t seem to be worth the risks.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.