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The Bengal Bite - "Canna"nomics - Jan. 29, 2021

Game, Stopped.

GameStop, a company that at one point appeared to have over 130% of its shares shorted, seems to have been involved in one of the largest short squeezes ever (a short summary of what happened from The Verge). One evidently orchestrated by individual, anonymous traders that inhabit the online forum, Reddit’s r/WallStreetBets. From under $20 per share to almost $350 in one month, and then back down to under $200 in one day, the GameStop roller coaster has become a mainstream story with something for everyone - retail investors vs. hedge funds, tech startups vs. regulation, establishment vs. millennials.

Over the coming weeks, the storyline of what actually happened will probably come together in longform New Yorker articles, congressional hearings, and filed lawsuits (a class action has already been filed in New York), to be followed by a Michael Lewis book in a year or two. But, for us, we wanted to quickly compare the short interest between large US MSOs, Canadian LPs, and WallStreetBet’s recent targets to give readers a sense of the scale involved.

This week's Bite:

  • AZ as it goes: Refreshingly, Arizona has avoided the delay that often comes with states’ implementing a new cannabis regime. (Marijuana Moment)
  • From sea to shining sea: 2020 saw huge sales growth in regulated cannabis markets and, with Kentucky, Kansas, Alabama, and South Carolina potentially poised to liberalize cannabis laws in 2021, there still remains secular growth ahead. (Marijuana Business Daily)
  • I'm sorry, but is this organic? Acquisitions are undoubtedly going to increase in 2021, but it remains to be seen how some MSOs will leverage their positive cash flow to organically grow to dominate existing markets. (Cannabis Industry Journal)
  • Ice Cream v. Pizza: No, not a food debate endlessly litigated by children and cannabis enthusiasts, but a view on how to efficiently run a cannabis delivery business from Brian Geddes at I Heart Jane, a major cannabis ecommerce platform in California. (Brian @ Jane
  • West Coast v. East Coast: In a return to hip hop battles from the past, some believe that the East Coast, rather than the West Coast, is where major cannabis brands will be born and thrive. (Rolling Stone)
Read more below:
Arizona begins recreational marijuana sales, just weeks after voters approve legalization

Arizona has avoided the delay that often comes with states’ implementing a new cannabis regime. Undoubtedly having a well-established medical market, estimated at over $700m in 2020 sales, helped establish a good foundation, and Arizona also had the experience of other states to draw on as well. Nonetheless, as the chart below shows, the 80 days between legalization and first adult-use sales is incredibly quick, and hopefully indicates a trend towards faster adult-use implementation by new states going forward. 

Cannabis M&A in the post-COVID era

In the coming year, cannabis companies that have doubled down on single-state organic growth will be competing or supplementing with acquisition-based growth strategies. Either way, investors will likely be more focused on profits or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) going forward, rather than just revenue.

Cannabis sales records smashed or set in 2020, and insiders expect the gains to continue

2020 saw the opening of many new state recreational and medicinal cannabis markets, and 2021 is expected to mirror that. Arizona just opened up recreational doors, and we know that already Kentucky, Kansas, Alabama, and South Carolina are looking at legalization of medical cannabis. These regulatory catalysts will continue to push gross national cannabis sales to new heights. 

🍦Ice cream vs 🍕 pizza: The Great Cannabis Delivery Debate

Ice cream-style delivery features an employee with a stocked up van who roves in an area, and can quickly stop by customers as they order on their company’s app (or consumers might just hear the jingle as the van drives by). Pizza style-delivery is hub based, where the delivery driver makes trips to and the hub for one or a few orders, potentially is slower but may give the customer more choice. We found this writeup by an industry veteran on the ins and outs of ice cream vs pizza, and the potential of mixing both, insightful.

Why the future of cannabis branding could be determined on the East Coast

Two qualities differentiate the East Coast from other cannabis markets: the region’s dense population and the number of limited license states. These unique conditions might potentially create the optimal environment for established brands to build lasting brand loyalty. As cannabis becomes an increasingly mainstream product, consumers will also expect legal brands to engage with them in the same ways that conventional CPG brands do. These audiences are looking for companies with distinct brand voices, along with consistent yet bespoke cannabis experiences that address their specific lifestyles and preferences.

Below the Fold

 
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This material is provided for information purposes and is not a recommendation or investment advice. The accuracy and/or completeness of any material included herein is not guaranteed. Entities associated with or managed by Bengal Capital or its principals may maintain positions in, or provide services to, the issuers mentioned herein.