A follower of mine left a comment on one of my videos saying that Decibel Cannabis DBCCF was lighting up the board with increasing numbers and that I needed to look at this marijuana company. Also, I am always on the lookout for the best marijuana stocks to buy. So, a cursory look showed that there was something very interesting going on there. As it is, Decibel Cannabis DBCCF stock is in fact lighting up the board. Metrics for this marijuana stock are up there with some of my Top Picks. Let us break down the numbers to show how this marijuana stock should be priced.
A few things from Decibel Cannabis’ latest financial statements. First, they used to be called Westleaf. I had looked at Westleaf and they had been included in some of my Top 10 videos within the listings a while back. However, I had never done a thorough analysis on Decibel Cannabis, or what was once called Westleaf.
Decibel Cannabis DBCCF Stock
Decibel Cannabis DBCCF stock is not only producing but also selling a significant amount of cannabis. Here are some markers to show the success of their sales:
- #1 brand in premium flower sales with an 8.4% market share
- #1 brand in concentrate sales with a 21.9% market share
- #3 brand in vape sales with a 10.0% market share
Please note, these sales numbers are from Decibel Cannabis’ Q1, 2021 financial statement. Also, these numbers are from the provinces on which Decibel is licensed to sell its cannabis: AB, ON, BC, and SK; not all of Canada.
Given this minor caveat, these numbers are exceptionally noteworthy. From time to time, I see companies print up statements where they have a significant market share. Auxly CBWTF states that they sell some 14% of Cannabis 2.0 in Canada. Decibel would be the other company that gobbles up the remainder of cannabis sales in Canada for certain segments.
Value Investing & Finding the Best Marijuana Stocks To Buy
I had an interesting conversation with a follower/subscriber via email while I was writing up this article. He stated that another, well-followed, YouTube vlogger had posted a video back in February on another marijuana stock to buy recommending Verano VRNOF, something that I just did in my last posting. We all know what happened back in February. Since then, two things have occurred:
- Marijuana stocks, after initially soaring, have since fallen significantly; and,
- The Vlogger has since taken down that video.
One thing this vlogger said in a comment below that video was that they had done further due diligence on management. They “found” something. Just curious: Did you hire a private investigator? Do you have inside information?
I thought the comment was silly, at best. He made a bad call and was searching for a scapegoat, and blamed it on newfound management issues. As it turns out, management is doing a great job with that particular company; look at the latest financial data.
I am a value investor. As such, I do not necessarily care much about stock price movement. I want to know one thing: What should a particular stock be valued at and why? When I hear people tell me they think a particular marijuana stock is going higher I always ask why? A lot of times I hear a lot of things that have nothing to do with anything about the relative value of a stock and why it should be priced at one price or another.
Cannabis Investing Newsletter Goal
This is what I am trying to do here is find value in companies, invest in the best ones, and tell individuals out there why this value exists. Remember, everything is relative. The S&P 500, to me, is a good barometer of how the general market is valued.
The cannabis industry was sold off significantly over the past couple of years. All through 2019 and through to the end of 2020, marijuana stocks took it pretty hard. Right now, on a relative basis, cannabis stocks are significantly undervalued… and underappreciated.
For instance, the average EBITDA/Revenue percent for the S&P 500 is about 7%. Most of the very best marijuana stocks I look at come in around 30% – 35%; these are the top performers. Yet, and as I mentioned in the last video, Verano Holdings is printing about 52% in EBITDA profits. And, yet, VRNOF is sliding lower.
The economy is transitioning and we will see individuals start to sell off their lower-performing stocks and seek out higher yields. Pot stocks will have their moment. For now, I am focused entirely on value and what the stock price should be worth based upon that value.
Cannabis will have its moment. It won’t be long. Be ready.
Is Decibel Cannabis DBCCF stock a Good Buy?
What does it take to get me to pull the trigger on buying a marijuana stock? There are several things about Decibel DBCCF Stock that I really liked and a few I thought were slightly off. First, the revenue growth and the fact that Decibel Cannabis is positioned with such a significant market share is obviously something that will catch my attention. But, they barely have a noticeable social presence (I could barely find anything on Instagram for the respective brands).
Revenue growth was solid for the quarter with an 11% QoQ increase:
I have read about expectations coming in around $35M – $40M for the next three quarters of 2021. However, I have not found that from management discussions. Still, this is within the wheelhouse of Decibel. Without any growth whatsoever, you could expect $30M printed in the next three quarters.
But, keeping in mind that Decibel Cannabis DBCCF Stock just printed 10% QoQ growth, if they do that for the next three quarters that places incoming revenue at about $38M for the remaining three quarters, bringing to total for the year to nearly $50M in revenue.
Given that, with increasing revenues, economies of scale will optimize production capabilities and margins should improve.
Gross margins for this quarter are already a highlight:
The very best cannabis companies I look at are printing about 65%. So, this is slightly above the highest rates. Given increased revenues I expect this metric to improve, even more, if but just a small amount.
Operating efficiencies are a metric of total operating costs over revenue. This gives a prospective investor a grasp of the efficiency that management is producing a product (but not a productivity measure). Operating efficiencies are solid, but if revenues continue higher this metric only has one way to go; down (You want the lowest possible number):
If revenues increase at a faster rate than operating costs, something that usually occurs, this metric will show that management is dedicated to containing costs despite increased revenues and profits.
Whenever I hear anyone say they have done due diligence on a company and its management, I sort of chuckle inside. What information did they get that the rest of the world, some of the smarter investors with hundreds of millions at stake could not get? Did they hire a private investigator? What was the mechanism that you used to receive this valuable information?
For me, this is the metric that I use to determine that management is on the right track and is dedicated to increasing revenues and keeping costs contained. Management is doing just that, they are containing costs and revenues are increasing. I expect over the next year this trend will continue.
EBITDA & Net Income
EBITDA profits are inevitable with gross margins and at 67% and operating costs below 40%. But, with Decibel Cannabis, they are not only EBITDA profitable but also net income positive. Here is EBITDA:
If revenues continue and we see this metric improve, look for the bottom line to improve continuously.
Decibel Cannabis Base-Case Scenario: A Marijuana stock to buy now
What would Decibel Cannabis be worth: Is this a marijuana stock to buy now?
Given increasing revenues, gross margins that are ultra-competitive, and decreasing operating efficiencies, continued profitability is in store for Decibel Cannabis, and I expect if they maintain this push they could see some $0.04 – $0.06 EPS over the remainder of this year.
All else equals, this puts Decibel at a 17.85% yield versus price. This is significantly undervalued when you look at this compared to the rest of the broader stock market. The S&P 500 is posting a 37.5x future earnings multiple. But, the stock market is continuously advancing which means the broader market may hit 40x future earnings by the end of this summer.
Given this yield metric, Decibel would have to advance to about $1.50 in order to get to the average for the S&P 500. That would merit an appreciation of approximately 400%. But, cannabis stocks are under-appreciated. So, despite the fact that you may get into this particular stock, this does not mean that new investors are going to rush into the market and push valuations back upwards. Too many people have been burned; just look at what happened in February.
As a value investor, all I care about is the value I can gain by holding on to a particular stock, and looking at DBCCF stock from this angle, Decibel Cannabis has significant value given the price it is trading at. I’ll buy now. I’ll wait for the market to catch up later.
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