4Front Ventures FFNTF stock is about where it needs to be to start a long journey upwards. After significant delays, the LA County Fire Department, being ultra-risk adverse, finally gave the nod for 4Front to occupy its new processing facility. Now, 4Front can execute its plan in California.
At the same time, keep in mind, 4Front is the #1 producer of flower in the state of Washington and have the #1 selling edible in the same. Their goal is simple: Take the success to other states. 4Front is now open for business in California while building capacity in Mass & Illinois. The cookie-cutter approach to growth should play handily for such an undervalued marijuana stock.
Given the four states 4Front will be producing & selling cannabis in, the production possibility is guided for $650M in potential revenue and $250M in EBITDA; that is ~38% of revenue which is excellent.
A Word On Guidance
I put together a potential FFNTF stock projection given the revenue guidance & EBTIDA. But, I caution some from simply taking the word of management implicitly. First, I do not expect that neither the revenue projections will be a straight line upwards, nor do I expect that 4Front will stop expanding.
Let me explain.
Given the current production capacity, 4Front thinks they can create $650M in revenue from what its facilities. I don’t question that. But, I do not think they are going to open up their doors and see straight-line growth. Instead, we are already seeing that in California, there are tough battles starting. Some of the latest numbers from earnings releases are stating that there are cost pressures and wholesale issues. 4Front is doing wholesale. I expect they will get the same treatment in the biggest state as every other producer.
But, to its credit, 4Front is also aligned with an excellent distributor with access to approximately 600 dispensaries. 4Front is the #1 selling edible. You get that way from getting your product out there and by people coming back buying more and more; repeat business.
Growth Story
At the same time, I do not think that 4Front is going to stop here at their current production possibility. They will very likely expand into new states. So, while gaining up to $650M is a long term expectation, there will be other states where they enter and likely, during the time it takes for 4Front to achieve an 80% level in their current states, they could easily add an additional 50% more in new states, bringing their revenue potential to $1B quickly.
Short Interest
On another note, I am including short interest in all of my videos and articles from now on (Towards the bottom). Short interest is exceptionally well across the board with cannabis stocks and I feel this is a story that needs to be told repeatedly so that potential investors can see what is playing out in the markets.
On the one hand, if you are looking to get in, since prices continue to slide lower, you are being offered very low stock valuations versus earnings potential
On the other hand, since shorts have control, do not look for stocks to move upwards any time soon. But, one day, when there is enough of a catalyst, these stocks are going to head upwards with significant force as these shorts are pushed out of their positions.
Bottom line for long term, value investors: The market will not ignore the profits and high growth rates of cannabis stocks forever. While on the short term, stocks are being pressured, the eventuality is that big, smart buyers will step in and take control.
4Front Ventures FFNTF Stock Comparison
Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:
- #18 Market Cap: $650M
- #77 Revenue Growth Rate: -4.2%
- #14 Gross Margins: 60.1%
- #37 Operating Efficiencies: 64%
- #14 EBITDA/Revenue: 22%
- #70 Cash/Debt Ratio: 7%
- #39 Total Assets: $53M
4Front has some solid numbers. But, these numbers are nothing more than a springboard. Now that California is ready for production and distribution, they will see a steady growth of revenue as well as more controlled costs since they will be producing their own products. So, I expect that there will be improvements in these metrics as time goes forward.
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4Front FFNTF Stock Financial Data
Here is a break down of the financial numbers for the latest Q3 financial statements. Keep in mind, this is a springboard and from here, we will see bigger revenue gains and improved financial metrics.
Revenue
On a whole number, revenue dropped about 4%. On a pro forma basis, revenue growth was $33.5M and we can expect a continuation upwards from that level:
Keep in mind that this is a new era, of sorts, for 4Front and the likely better number to consider with revenue is the pro forma $33.5M and from this level, I am expecting a move upwards of approximately 5%, or an additional $1.65M higher in the next quarter.
Gross Margins
4Front has already achieved high-performing gross margins:
Of the companies I look at, hitting between 60% – 65% is where the better performing companies are. Given increasing revenue potential, this should add additional marginal profits to the bottom line. This additional revenue will have outsized gains in profits over the base revenue. Given that, I can also expect continued increases in revenues will see a drifting higher in gross margins.
Operating Efficiencies
This is one area that 4Front needs to grow into; operating costs:
Keep in mind that operating efficiencies are a mathematical equation of total operating costs divided over total revenue. On a pro forma basis, operating efficiencies were closer to 49%. And, as revenues increase, given a fixed operating cost, I am expecting this metric to continue to drop lower and lower and should hit ~47% in the next quarter. Then, as production & sales ramp up in California, 4Front will fit into its operating costs more conservatively.
EBTIDA
Despite the drop in revenue for the quarter on a whole number, 4Front printed solid EBITDA profits:
The $7.5M is ~22.5% of current revenue. That is in line with the S&P 500’s average numbers. That is a solid place to ramp up from. Expectations are that 4Front hits 38% with its future production capacity. So, from this point, there will be continued growth higher in this metric.
Continually, I will iterate that 4Front is moving towards higher and higher profits as their production begins in California and other states. Look for bigger gains ahead.
Net Earnings
Now that production is going to ramp up, and with increased margins trickling down through EBITDA, net earnings will be the next milestone:
When it comes to net earnings, if we look above at the possibility of revenue increasing 50% overall, hitting an average of $50M per quarter over any following quarters, with a static operating cost and current gross margins, you are looking at ~33.5% in total operating costs versus revenues. Given a potential 35% in cost of goods, and an additional 10% in continuing costs, 22.5% net earnings v revenue. Keep these numbers in mind.
Cash On Hand
This may be a small source of concern that, while 4Front has access to cash they are short on cash-on-hand:
I think that the phrase “Cash is King” will play out here in a large way. Companies that are sitting on significant piles of cash will ultimately rule in the cannabis industry. But, certainly Canopy Growth has proven that you cannot look on a linear basis at just that one metric; you have to consider all metrics.
For now, cash is low and 4Front will need to work diligently to manage its cash position.
Cash:Debt Ratio
As for the cash:debt ratio, 4Front actually hits at the lower end of the spectrum comparatively as of the current financial statements:
Should 4Front hit its revenue goals and are able to float themselves, turning a corner with becoming cash flow positive, this will likely play out nicely fro them. I imagine a lot of effort is being made to negotiate its current position.
Total Equity
For a company that has such a large market capitalization, comparatively, the total equity is on the lower end:
I am going to do an upcoming video on market capitalization versus total equity. This should be something contextual that investors should keep in mind that. There should be a correlation between the two. And, being able to put the two together and compare companies total equity to their market capitalization will put some stocks on notice.
4Front FFNTF Stock Activity
This is going to be a continuous segment in my analysis from now on since the short positions are in charge as much as they are. I am going to break down two sections of the stocks so anyone can consider this in their considerations for acquiring any one stock. I will be looking at three areas:
- Insider acquisitions/sales
- Short selling
- Restricted & Unrestricted shares
I think everyone should keep these kinds of metrics in mind when deciding to buy/sell/hold a stock.
Insider Activity
There are two notable insider trades over the past several months to include an indirect insider investment banker acquiring two rounds of some $9M and an additional $900K. Also, there was an insider picking up some 50K in options.
Short Seller Activity
Here is something that is really telling the story of cannabis investing; short selling activity:
First, there are only 3 data points in the past month where short selling was less than 50% of daily volume. Many retail investors got into cannabis stocks early and have been sitting on positions that are not going higher. So, they are likely not adding enough positions to push cannabis stocks upwards.
If you think about it, it makes perfect sense that someone would want to go short. As positions drift lower, short sellers start to push these stocks lower and lower. They make money. They are emboldened even more, and take over the market.
There needs to be a catalyst to clear these people out. But, I do not see that any time soon: SAFE is not included in the Senate portion of the NDAA. No love there.
But, rest assured, the market will not ignore profits forever.
4Front Ventures FFNTF Stock Chart
The recent run up in cannabis stocks appears to have played out and, we are starting to see stocks drift back to their original levels:
I am keeping an eye on some of my top picks to see the broader progress of cannabis stocks. Shorts look like they may prevail and, we may see stocks drift lower and lower for some time.
Is 4Front Ventures FFNTF Stock a Good Investment?
4Front is expecting to see some 38% of revenue in EBTIDA with its production possibilities. And, I expect that they will push their company into new areas. I am expecting over the next 1 – 2.5 years that they likely print $1B in revenue, or at least have the full capacity to do so.
There is a proven product in 4Front’s portfolio. I expect that success will continue. While I do not see a straight line upwards with revenue, being able to hit an eventual $650M in revenue with a respectable EBITDA would certainly push this stock upwards over time.
Looking ahead, given the success of 4Front’s products, and expansion, FFNTF will certainly go upwards. But, I don’t like to project too far without company guidance; they know the insides of their business better than anyone else.
Still, given what could be, given a long, steady revenue growth story and improving margin metrics, 4Front could easily print the $650M in between 1 – 2.5 years with some 10% net earnings; $65M in net earnings.
Given the 592M shares outstanding, this puts EPS potential at $0.109. Given a 100x future earnings multiple, this puts FFNTF at $10.90. It is currently trading at $1.00. I would expect this to occur over the next 1 – 2.5 years time and with continued revenue gains, increases in margins, we will be able to watch these numbers and this projection come to fruition.
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