The Valens Company VLNS Stock Forecast & Analysis

The Valens Company VLNS stock is one that I have mixed feelings over.  Before I get into the VLNS stock forecast, I wanted to look at the financials and what the company is doing now.  First, their business model is that they are a white-label manufacturer in Canada.  For those who do not know what white label manufacturing is, it is a company that produces products for other companies.  They do everything from concept, business planning, production of product, and distribution.  This could be lucrative except for one thing: There is no premium products in this.  The company that is having The Valens Company do the work for them gets the premium margins.  This is not to say that The Valens Company could not be profitable in this nor, that it is not one of the best cannabis investments.  But, I have always been a bit suspicious on this.

Given that, Sundial Growers SNDL stock had been acquiring some of VLNS stock over the past few years.  My thoughts were that eventually SNDL would ultimately acquire the entire company and there would be premium involved.  If Sundial Growers were to acquire this company then there would be an interesting additional feature as Sundial owns one of the biggest dispensary systems in Canada and The Valens Company could turn to perspective customers with a solid distribution deal as well as the white label production capabilities.

But, what about The Valens Group entirely on its own without the hope of being acquired?  Would I drop some of my own money into this?

Along with the white label portion of the business, The Valens Company is in the process of acquiring other businesses and will now be in the pre-roll portion of the business from one of its recent acquisitions.  Should the deal with Sundial ownership translate into a strategic deal of distribution into the newly acquired dispensaries, this could push revenues higher.

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The Valens Company Stock Financial Data

The Valens Company Gross Profits

There is no revenue growth here whatsoever.  If you are to look for a company to invest in, especially a company in the cannabis industry, hopefully your first criteria would be increasing revenue growth.  There are plenty of examples of a company which is growing its revenue as the industry grows.  The Valens Group is not increasing revenue, as the latest financial release shows.

Simultaneously, gross margins are positive but, revenue has not scaled up to a point where margins are competitive with other companies.  At 16%, this is on the lower end of margins.  It needs to be noted that management stated an increase to 34% in the gross margins.  My margins are not adjusted; I look at them in plain black & white.

What I want to know is what the new acquisitions are going to do with regard to increasing revenue.  I have not seen any pro forma metrics on this yet but, I do not think there will be substantial gains here.

The Valens Company Operating Profits

Whereas gross margins are positive, operating efficiencies have not scaled up to really cover operating costs.  Operating costs are ~100% of total revenue.  At this pace, revenue would need to triple to put operating efficiencies at a competitive level.

And, cumulatively, operating profits are negative.  Operating profits are total revenue less cost of goods and total operating costs.  Until The Valens Company gets to a point where gross margins are competitive and corporate costs are more in line with revenue, there is no clear path forward to EBITDA profits and then the eventuality of net earnings positive.

The Valens Company EBITDA & Net Profits

EBITDA is negative and represents about 50% of revenues.  The most competitive companies are approximately 35% EBITDA to revenue.  Again, The Valens Company is negative.

And, net earnings was negative.  There are plenty of companies with a negative earnings.  But, these other companies may have sufficient cash on hand to weather any long-term cash burn.  The Valens Company has lost about $15M for this quarter and, they only have $17.5M more.  They will need to raise more cash.

That being said, the latest round of debt financing brought in $40M of which there is now the mentioned $17.5M remaining.  The debt financing did pay down older debt that had higher interest rates; a plus.

The Valens Company Cash On Hand

I purposely left the chart above at an obtuse level for the visual effect.  Primarily, you can see that cash:debt ratio is low, although not the worst in the industry.  While The Valens Company had just done some debt financing, the cash situation puts them in a position where they have to do it all over again.

But, there is plenty of equity to work with for financing debt.

The Valens Company Total Equity

The Valens Company is sitting on approximately $165M in equity so, there is plenty to work with there.  They are entering new markets and acquiring other companies.  But, the revenue growth through organic growth is virtually nonexistent.  Still, for now, entering into Quebec has its capabilities.  And, if through acquisitions there is a method of adding new revenue that will contribute to the bottom line, this has the potential to turn things upward.

But, I am doubtful on this.

The Valens Company VLNS Stock Forecast

The Valens Company DCF

First, there is some value here.  But, there is no growth.  So, my take is simple: If you are in this and cannabis federal legalization takes off, it would be a perfect opportunity to get in and out quickly.  But, long term, both Sundial SNDL Stock and Valens have blown it for me.

Is The Valens Company VLNS Stock A Good Investment?

Honestly, I think The Valens Company gets acquired by Sundial at some point.  But, it may be that even Sundial is waiting until a more clear path to profitability is accomplished.  For me, there are plenty of cannabis investments that could be profitable in the future, or already are.  I do not see a clear path forward with The Valens Company on its own.  But, I have always been intrigued by Sundial Growers owning as much stock of VLNS as they do and that this may be an acquisition potential.  Then, with this as a piece of the puzzle, it may be a more lucrative opportunity for an investor in VLNS.

Is it worth it?  Meh… I’m thinking there are other, more optimal opportunities.  This is not to say that VLNS stock does not go up one day as much as it is to say that there may be other cannabis investments that go up higher, faster, and make a better cannabis investment.

The Valens Company Financial Data

The Valens Company VLNCF Stock Financial Statements