Decibel Cannabis DBCCF Stock Forecast & Analysis

Decibel Cannabis DBCCF stock is one of the few smallish Canadian cannabis stocks that I like.  They are starting to build up momentum with revenue and, given its market share and positioning, this is one of the best cannabis stocks – My Top Picks.  I wanted to lay out the groundwork for the DBCCF stock forecast and show where I see the potential for this cannabis stock.

If you look at the latest financial release statement, there are a few things that stand out for Decibel Cannabis DBCCF stock.  First, this is their 7th consecutive Adjusted EBITDA posting quarter, decibel Cannabis made significant adjustments to its balance sheet and, even paid off a convertible debenture versus diluting existing shareholders, as well, Decibel Cannabis maintained its lofty market share.

Decibel Cannabis Converting Debentures

This warms my heart a bit.  There were convertible debentures that came due, and instead of taking the easy pathway, management took the approach of cleaning up DBCCF stock balance sheet with restructuring debt, and paying off the convertible debenture instead of allowing the debt to convert and diluting shareholders.

There are a few things a value investor will want to look at with regard to how management is taking care of investors now, and into the future.

If total equity continues to rise, this is the ultimate in showing that management is creating value.  But, if during that same course, management does not dilute existing shareholders with conversions such as this, it shows that management has a keen eye peeled toward taking care of shareholders.

Given this, it brings in a sense of security for current and future prospective shareholders that management is working for them.

Upgrading Processing Plants

There were several upgrades and licenses issued for processing plants which, these will add to production gains with economies of scale, as well as optimizing product quality.  And, there have been new, innovative products launched which, should these products continue to grow and Decibel Cannabis continues to gain on market share, the additions to top line can only improve bottom line numbers.

Market Share & 2022 Outlook

On the market share front, Decibel Cannabis continues to improve and maintain an average of over 4% market share where they are licensed.

Also, Decibel Cannabis gave early indications as to where they expect to be at the end of 2022; here are the highlights:

• Strong 2022 drivers now in place to generate substantial revenue and EBITDA growth;
• Anticipate achieving milestone of positive cash flow from operations in the first half of 2022;
• Driving organic growth, targeting 2022 market share growth of over 40% versus 2021;
• Canadian recreational market forecasted to grow more than 30% over prior year;
• Targeting 40 – 45% product gross margin by mid-2022;
• Organizational realignment to focus on 4 strategic priorities (See Strategic Priorities and Five-Year Outlook).

Breaking down the numbers above you see some of the potential.

EBITDA Growth

In the DBCCF stock forecast below, I used very, very low numbers compared to where Decibel Cannabis is likely to end up.  There were significant Cost of Goods in this quarter and, I had troubles finding where that was driven from.  Because of that, I eased back on the DBCCF stock forecast.  This means I am likely to come in below the actual potential, and I have no problem undershooting for now and upgrading later.

Increasing Organic Growth

This is music to my ears.  Market share is currently 4.3%.  Decibel Cannabis has an idea that they can increase that number by 40%; about 1.7% giving themselves a 6% total market share.

This is going to be driven by organic growth.  And, because organic growth will utilize existing structure, through expanding revenues with sales increases, this will improve cost metrics such as gross margins & gross profits.  This becomes a sort of sling-shot to accelerate profits which, the market does not seem to be catching on to.

Positive Cash Flow from Operations

For those not savvy on this term, this means positive cash flow just below operating costs.  Driving this number upward means that the core business is profitable with only financing the business being the last expense.

From here, this shows the potential for business strategy in that they can be profitable and with more scale, will achieve net earnings positive.

Decibel Cannabis Financial Data

For this quarter, Decibel Cannabis printed solid numbers.  Its market share continues to grow and, with intensive product focus, management restructuring debt, and organic profitability just on the cusp, DBCCF stock is a cannabis stock to buy.

Decibel Cannabis Gross Profits

Revenues hit a record high. And, management is banking on continued increases in an expanding market, Canadian cannabis, that Decibel Cannabis will see organic growth drive a higher market share and bigger revenue.

What I want to know is: How?

If Decibel Cannabis is talking to more and more dispensaries to get its products on more shelves, that would drive revenue gains.  Also, if there is an increasing customer retention rate, that, again, will drive revenue gains.

In the meantime, adjustments in cost of goods saw gross margins take a hit.  But, with the stated goal of hitting positive operating cash flow, my best assumptions to work with are that Decibel Cannabis is going to see a renewed move upward in gross margins.

Fro now, the end-of-year 40% – 45% gross margins target shows that there is going to be growth in this area.  Gross margins for the broader stock market are coming in about 55%.  Some of the best cannabis companies I look at are printing 65% and up.  The 40% – 45% is a solid target to hit for this year and will add to positive EBITDA.

Decibel Cannabis Operating Profits

As was mentioned, Decibel Cannabis is targeting positive cash flow from operations; a key milestone for EBITDA profitability.  Operating efficiencies are low relative to revenue.  Management is showing that it is focused on costs here, and that is something that is important to me along with paying off the debentures instead of diluting shareholders.

The best cannabis stocks are printing roughly in the 30% – 35% area at this point in the game.  But, the best companies within the S&P 500 are printing about half of that, so there is still a lot of room for improvement here.

But, it is a process, not an event.  There needs to be a core business structure and, that structure has a cost attached to it.  Given that, operating efficiencies are a purely mathematical calculation of costs over revenues.  If costs remain contained (the numerator), and there is increasing revenue (the denominator), the end result, a ratio, or percentage, will be smaller and smaller, which is a bigger and bigger achievement.

The big gains toward EBITDA profitability and cash flow positive from operations are clearly going to come gross margins.

Decibel Cannabis EBITDA & Net Profits

For the 7th consecutive quarter, Decibel Cannabis printed adjusted EBITDA profitability.  The next step is improving upon that number and getting to a much more solidified number that does not need to be adjusted in order to be positive.

If there are bigger gains in gross margins, some moves higher of about 30% off of revenue at approximately $15M per quarter, that is $4.5M more to be added to EBITDA profitability.  This would push Decibel Cannabis toward net earnings profitability.

The goal is to achieve this by 2022 end-of-year.  This may be what is needed to launch DBCCF stock upward.

Decibel Cannabis Cash On Hand

After restructuring some debt, Decibel Cannabis also put some cash into its pockets.  Despite that, the restructuring of debt pushed total liabilities higher which, even though there is more cash on hand, on  a ratio basis, Decibel Cannabis is not in the best of positions from a metric standpoint alone.

However, if there is sufficient organic growth, cost savings after restructuring and opening of newer processing facilities, and if Decibel Cannabis can also improve its gross margins as much as they are targeting for this year, DBCCF stock will be poised to really take off since they will likely achieve profitability soon.

Decibel Cannabis Total Equity

The slow move higher in total equity is there for Decibel Cannabis.  This is one of the key things I look for in a value investment.  Total equity shows me if management is truly focused on long term shareholder value by growing the business in a manner that is balanced.  This is what will ultimately drive DBCCF stock.

Also, and to reiterate, the move to pay down debt, despite taking on a bit more in liabilities, instead of taking the easy route and diluting shareholder value is a big plus for me.

Decibel Cannabis management will continue to grow the company with cost cutting and savings as a core focus.  And, they will do so with prudence and balance.

This can only benefit investors in DBCCF stock over many years.

Decibel Cannabis DBCCF Stock Forecast

Decibel Cannabis DBCCF DCF

For the Decibel Cannabis DBCCF stock forecast, very likely I came in a bit on the softer side.  That translates into more upside potential.

I used a softer EBIT level in putting together DBCCF stock forecast.  The reason is that gross margins slipped as much as they did this quarter.  But, if we look to what management states is probable, there is a lot of potential opportunity for improvements with margins.

Gross margins are expected to increase to 40% – 45% for the year as the target rate.  However, that is an average and already, Decibel is lagging.

Still, if Decibel Cannabis can achieve its stated targets, then my numbers are low.  From there, this is a matter of me adjusting upwards.

Is Decibel Cannabis DBCCF Stock A Good Investment?

There are a lot of reasons why I like DBCCF stock, and why DBCCF stock is one of my top picks.  Management took the move to not dilute shareholders while they rearranged its finances.  This shows to me that management is more likely to do what is best for shareholders down the road.

But, the growth potential is another thing that catches my eye, and one of the reasons DBCCF stock will likely push upward.  If Decibel Cannabis can achieve its stated goals, and grow revenue as they expect, shareholders of DBCCF stock will be well rewarded.

But, and as we are all learning, this is a long game.  I fully expect there to be a bit of a surge with cannabis federal legalization in the coming weeks and months whenever this occurs in the US.  Then, I am looking for companies to up-list to Nasdaq, something that Decibel could do now since they are in Canada.

If you are playing the longer game, I think the upside on Decibel Cannabis is attractive along with many other cannabis stocks.  This is why DBCCF stock is one of my top picks.