4Front Ventures (OTCMKTS: FFNTF)
4Front Ventures (OTCMKTS: FFNTF) Our View
We believe that 4Front Ventures is a buy, with a one-year price target of $1.40, implying potential upside of 25%. We think that strong revenue growth as a result of the strategic building of new dispensaries and production facilities coupled with the political landscape regarding cannabis legalization makes this an attractive stock.
Furthermore, from a technical standpoint, the stock exhibits a double top with resistance at the $2 mark on the daily timeframe. Additionally, there is a cup-and-handle pattern on the daily chart. This is a bullish pattern, as once the final handle forms, the stock is expected to breakout after some consolidation.
Background
4Front is a cannabis operator and retailer that provides a portfolio of over 25 brands varying from flowers, concentrates and edibles. They offer the following brands:
- Flower: Funky Monkey, Private Reserve, Legends, Mini Budz
- Edibles: Chewee’s, Ka’Kau, KOKO Gemz, Hi-Burst, Left-Handed Brand, Mari’s Mints, Marmas, Pebbles, Verdure
- Concentrates: Crystal Clear, Terp Stix, Golden Goo, Evergreen, EZ Vape, Melo Premium Vape
- Wellness and Pain Relief: Pure Ratios (CBD), Verdure
The company has two business segments: THC Cannabis and CBD Wellness. The THC segment is further divided into two operational segments: retail and production. In the THC retail segment, 4Front owns and operates two dispensaries in Massachusetts, two in Illinois, and one in Michigan. These five dispensaries make up what is known as the “Mission Dispensaries” brand.
In the THC production segment, 4Front owns and operates two production facilities in Massachusetts, one in Washington, and one in Illinois. In these production facilities, they produce cannabis flowers and extracts. To produce the flowers, they use growing medium, nutrients, water, electrical power, soil adjuvants, and beneficial pests. To produce extract, they add propane or butane, which acts as a solvent.
The CBD Wellness segment focuses on CBD products. This segment operates in California and is branded “Pure Ratios.” The CBD products offered in Pure Ratios include patches, salves, roll-ons, and tablets.
The Stock
4Front Ventures was founded in 2019 through a merger between Cannex Capital and 4Front Holdings. Since its debut on the OTC markets, the stock has had a wild ride forfor a couple of years. After initially dropping nearly 50% from its listing price of $0.70, the stock rose nearly 500% to $2.25. It then went on a downtrend falling back to $0.174 by April 2020. Retail trading drove this stock back up after bottoming at the pandemic lows. The stock peaked again in late February of this year at $1.98 and dropped due to concerns about inflation. It hasn’t recovered from the February peak because most of the shares were owned by retail investors, who have in general exited the trade, like many of the other cannabis stocks.
Source: Yahoo Finance
Current price (as of Tue. July 20): $1.12
52-Week Low-High Range: $0.38 – $1.98
Average Volume: 638,620
Market cap: $97.66M
Shares outstanding: 87.19M
Stock Performance vs. S&P 500
Note: S&P 500 denoted by bold sky blue line Source: Yahoo Finance
4Front Ventures (OTCMKTS: FFNTF) Catalysts
1. Solid revenue growth driven by the opening new production facilities and dispensaries
4Front Ventures has shown strong revenue growth, posting 2020 revenue that is triple that of 2019.Revenue for the current fiscal year is expected to be nearly triple of 2020’s. The reason for this revenue growth is the opening of new dispensaries and production facilities. In 2020, 4Front opened three Mission dispensaries in Illinois and Massachusetts. Another Mission dispensary will open soon in Brookline, Massachusetts following unanimous approval from the Brookline Select Board. Furthermore, a new cannabis manufacturing facility in Commerce, California is expected within the next couple of months. 4Front’s increasing presence in these states is noteworthy since these states represent the top cannabis markets in the United States.
2. Senate Democrats unveiling of federal cannabis legislation
Yesterday, Senate Majority Leader Chuck Schumer released a draft of the federal cannabis legislation bill called the Cannabis Administration and Opportunity Act. One of the provisions stated in this potential piece of legislation includes the decriminalization of marijuana at the federal level. However, local governments would have the final say as to the legality of marijuana consumption in each of their respective states. It is unlikely that this legislation will be passed due to opposition from moderate Democrats, but with Senate midterm elections coming in 2022, we think that Democrats could strengthen their majority. If the Democrats strengthen their majority in the Senate, it will be much easier to pass their agenda. “The future of cannabis legislation is a matter of when and not if” said David Goldstein, co-founder of Our Green Solutions – A leading cannabis consulting agency. “While I believe this legeslative change is around the corner, we must also consider how it will balance state legeslations. I do not expect the industry to have a hard reset”. Considering that 4Front Ventures strategically centers its operations around a few states, potential legalization would allow the company to explore other states as markets for its products..
4Front Ventures (OTCMKTS: FFNTF) Risks
1. Currently still trading in the Over-the-Counter (OTC) Markets
4Front Ventures still trades in the OTC markets, meaning that investing in its stock is not readily accessible to many, unless investors use select brokerages that support the purchase of OTC securities. The stock is also relatively illiquid, with an average trading volume of 362,000 shares exchanging hands. Most of the other cannabis stocks publicly traded are not listed on the OTC markets, but rather on a stock exchange such as the Nasdaq. More well-known cannabis stocks with greater trading volume that are listed on the well-known Nasdaq Composite are Tilray, Aurora Cannabis, and Canopy Growth.
2. Increased competition in the cannabis space
With the potential for federal legalization as well as the passing of the SAFE Banking Act,more players may enter the cannabis space. Many of the current cannabis companies listed on the U.S. stock market are Canadian, but if these acts pass, , more companies are expected to build and/or expand operations in legalized states. Furthermore, the market will open to more recreational and medical marijuana users, leading to increased demand. Competitors will thus expand their offerings to cater to individuals. There will be increased competition which in turn could reduce revenues.
Financials
Our model predicts that the company will turn profitable by the end of the year and continue to sustain it for years to come. We do not assume that 4Front Ventures will expand in other states yet due to their strategic business approach of operating in the most lucrative cannabis markets, but if they did, then revenue and profit guidance would need to be revised upward.Mari
4Front Ventures revenue has grown by over 200% from 2019 to 2020 and is expected to do so again from 2020 to 2021. The reason for this revenue growth is the opening of new production facilities and dispensaries. 4Front as a business wasn’t profitable in 2019 or 2020 due to high operating expenses. In 2019, a goodwill impairment charge of over $146 million from the Cannex business combination contributed to the high operating expenses. For the current year, we expect revenue to increase as a result of the opening of new production facilities and dispensaries. According to CEO Leo Gontmakher, the company utilizes low-cost production methods, therefore increasing the amount and quality of its products.
On May 25th of this year, 4Front Ventures reported Q1 earnings, announcing revenue of $31.4 million, a 26% increase from Q4 2020 and a 33% increase from the same quarter last year. The company also reiterated its expectations for the current year’s revenue to be in the neighborhood of $170 million to $180 million. On the guidance front, 4Front updated investors on their progress in the construction of new production facilities in California and Illinois. The company also currently has $18.9 million in cash with roughly $47.3 million in debt due in 2024. Given the projections we made, they seem to be in good shape financially.
4Front Ventures (OTCMKTS: FFNTF) Written by Jay Devon
4Front Ventures (OTCMKTS: FFNTF) Edited by Ryan Cunningham