StableView Asset Management President on Viability of Cannabis Technology Companies

StableView Asset Management President and Portfolio Manager Colin Fisher examines the offerings from cannabis technology companies and discusses their long-term viability. Fisher notes that cannabis technology companies primarily provide supply chain logistics. Fisher stresses that cannabis technology companies are merely duplicating platforms that already exist. He is unsure if these companies will be able to scale significantly before the US market opens up and established tech platforms enter the cannabis space. Fisher notes that programmatic advertising platform AcuityAds Holdings Inc (CVE:AT) (OTMCKTS:ACUIF) (FRA:K3S) has been impacted by sector-wide issues in the tech space but based on current revenue is undervalued. Fisher also points to iLOOKABOUT Corp’s (CVE:ILA) (OTCMKTS:ILATF) purchase of Clarocity Corporation (CVE:CLY) (FRA:4ZA) as an incredibly accretive acquisition.

Transcript:

James West:   Colin, welcome back.

Colin Fisher: Thanks for having me.

James West:   Yeah. So Colin, what’s new in the world of Canadian technology since we talked to you last?

Colin Fisher: When did we talk last? It’s been a while.

James West:   I don’t know. Everything to me, these days, seems like it was yesterday. A healthy diet of CBD.

Colin Fisher: Does it? I was going to say, yeah. Um, you know, not a ton. I mean, it depends. I mean, if you want the inside baseball, I think there’s, you know, I think there’s a lot of really good, interesting companies. I don’t know if we spoke about Vena Solutions being bought, recently.

James West:   Venice?

Colin Fisher: Vena.

James West:   Vena.

Colin Fisher: Yeah. I don’t know if we – I know we spoke about it, but I don’t know if we’d spoken that. So JMI and Suncanna came in and bought, invested $115 million USD into them. A lot of people celebrated it, however, you know, the truth of the matter is that’s a little bit of celebrating a Trojan Horse coming in.

James West:   Oh, really?

Colin Fisher: Well, I mean, it’s all US private equity that came in on the last round, so it wasn’t a – there was no Canadian capital that really went in on that round. So a lot of the economics are going south of the border. But I mean, that’s a huge win for us.

James West:   Right.

Colin Fisher: I mean, our return on that was about 477 percent.

James West:   Okay, but that’s one of your consistent sort of like, hey, everybody, we got a problem over here, is that these opportunities are being picked up and plucked from the Canadian grass.

Colin Fisher: Yeah, on an ongoing basis. We’re in the process of putting together a publicly traded company that will help address that issue. We think there’s a massive, you know, we think there’s a massive funding gap; in fact we don’t think, we know. And you know, when you look at it from the perspective of, you know, the concept of a crowded trade or an uncrowded trade, your last guest was talking about all this capital chasing very few deals.

James West:   Right.

Colin Fisher: And so invariably, you get a disconnect in the valuation. And so the question that would come: do you want to be in a super-crowded trade – I mean, listen, I’m not pooh-poohing anything in the cannabis space, but there’s a ton of money chasing ever-fewer deals, it seems like, though a lot more deals, you know, I see them coming across my table as well. A ton of deals are going out, and eventually, I think there’s going to be a realization of the pricing, the reality, you know, the dollars chasing and the valuation of what the underlying asset actually is, is going to come to some sort of reconciliation.

James West:   You mean in the cannabis space?

Colin Fisher: The cannabis space.

James West:   That’s never going to happen. [laughter] Everybody’s smoking the supply, so it’s like, they’re only going to get higher and higher.

Colin Fisher: Yeah, you know, this is the other problem, you know. The other thing that’s interesting is to see, there’s a lot of – I mean, if you look at this from a multi-angled point of view, there’s a whole bunch of disconnects from what is being stated to what is actually happening. I mean, one of the other issues is, is there enough supply to meet the demand, and therefore if there isn’t enough supply to meet the demand, are the valuations actually too far ahead of themselves? Because there’s a question as to whether or not – like, if weed went up to like $80 a gram, then you know, that which is being supplied in the black market will come in to fill the demand. But you know, there’s a regulated environment, so I don’t know if the true normal supply/demand metrics would come into play, because normally, in an unregulated market, the price of the commodity would rip up so high that people would go in and fill the demand.

I think part of the issue is that there’s a – I just don’t know if there’s the quality there. I mean, I keep hearing from a whole bunch of different people. I should probably smoke more weed, I would probably be a far more affable, nice individual.

James West:   Just smoking it does not make you much of an authority. It makes you a connoisseur of smoking weed, but –

Colin Fisher: No, no, but that’s what I’m talking about – whether or not the quality is there.

James West:   Well, I mean, I can tell you from firsthand experience that the biggest lament of Canadian cannabis connoisseurs is that you still don’t get premium cannabis in the mail in Canada.

Colin Fisher: Well that’s what I was saying, yeah.

James West:   And I say that not because the quality of cannabis was low to begin with; it’s because of the long-tail process from packaging to consumer receipt as a result of over-regulation, that causes an inability of the cannabis producers to supply the cannabis consumers in a time frame in which the perishable best before date of cannabis does not pass. So you’re absolutely right: the quality is not there. The quality will come. The bigger problem, I think, and this is the same is that’s happening in California, it’s already happened in Washington and Oregon, is that they figure in California they already think that there’s five times more weed being grown than is consumed by all of black, medical and recreational legal markets combined.

In Canada, the suspicion is that it’s up to four times the consumed cannabis is from the black market because the quality is not there. So this is a fundamental problem that is plaguing the legal cannabis industry on both sides of the border.

Colin Fisher: I agree. I mean, part of the issue too is that now, listen: when I was a kid, you know, if you, you were always worried, oh, if I get caught with a bag of dope, I’m screwed. But now, you can hold up a bag of dope and it’s not like some cop is going to be able to go ‘Let me check the DNA and the origin of that’. So now it just means that you can walk around, have X amount of possession, I don’t know what the rules are, but you can have X amount in your pocket and there’s no issue in terms of you getting busted at that level.

And so, you know, the supply chain and logistics and a whole bunch of other things, when are they going to put in other controls? It’s like in oil, you know, the put in additives to know exactly where the oil comes from. They know exactly where that oil comes from, they know the style of oil and they put in dyes and other traces to know if it’s black market oil or legal oil, or gasoline or whatever it is.

James West:   Yeah, molecular marking.

Colin Fisher: Yeah, exactly. Whether they’re going to go to that or not, my suspicion is not. I just think that there’s such a running – they’re so far behind to the catch-up mark. This is a – you know, these guys – listen, I think the industry writ large has done a really good job. These guys are building the plane while falling out of another one, you know? And they’re trying to make sure that they don’t hit the ground and they can continue to go. But I think most of the guys have done a very good job, but it is, there are a lot of market dynamics at play that are not necessarily…I think they’re in the companies’ favour long term, but I think that the, you know, it’s funny; Amara’s Law, in technology, I think has a certain amount of truth in the cannabis space as well.

Amara’s Law states that we overestimate the impact of technology in the short term, and we underestimate the impact of technology in the long run. That’s why you see, you know, for example, an internet bubble 1.0. All the rules that were, you know, this thing is doubling every four months, and this and that and the other thing, and everybody thought just having viewers of a website were the big thing, or just having a website – no one really knew what the impact was. Now, you know, 15 years later, all the different technology, all the bottlenecks, all the elements got out of the way, and now you have really powerful companies that make a ton of dough in the technology space. But it took a long time for, you know, the business models figured out, how it was going to sell, all that kind of thing.

James West:   Right. So from your perspective, is there a technological solution to the question of supply in the cannabis supply chain? A question of quality, rather, in the cannabis supply chain?

Colin Fisher: Well, you know, I’ve said this many times: I think part of the issue is that all of the things that are required for the cannabis sector exist already. They exist in the pharmaceutical area, they exist in the liquor – any supply chain logistics, perishable goods…all of these people understand supply chain and logistics and how to get stuff from Point A to Point B. We’re getting some of them, for example, chain of custody controls and understanding where origin comes from is getting ever-better. And those are, I think, will be super important long term in the cannabis sector, but do I think the technology will address it? Yes. Do I think there’s a whole bunch of companies running around trying to address it right now? I’ve seen a ton of technology companies in the weed sector, where they’re basically replicating what already exists.

And so the question then becomes, will these companies be able to survive the onslaught? Like, once Federally in the US it becomes legal, then all the stigma goes away, and a lot of these companies are going to step in. Now, maybe some of what they’ll do is acquire some of these companies, not necessarily for their technology; 99 percent of the time, I think they’re going to take the technology and throw it out the door, but they’ll take them for the clients and getting an immediate footprint in that space.

But I don’t think there’s anything, really, within the cannabis sector from a technological point of view that is materially different than anything else. And in fact, most of it is materially worse than some of the more mature areas, but it’s just because they won’t go in because of the legal, the stigma, and a few primarily regulatory risks.

James West:   Okay, so that leads me to my next question for you, and it sounds like you’ve been looking at technologies related to the cannabis industry. And from what I’m hearing, you’re saying you haven’t really found any that you would consider investment-worthy because they’re all replicants of something that already exists?

Colin Fisher: 99 percent, I would say, yeah. And it depends on what your time horizon is, too, because you have to remember, most of these companies are private. And so the difference between private and public investing is that you have to take it from a very different point of view: do I have an exit? Is this sustainable? Is it five years? And part of the problem right now along the technology space – sorry, around the regulatory framework – is that tomorrow somebody could Tweet, I’m not saying who, but somebody, and they could change the regulatory framework like that. Or they could say this is what’s going to happen.

And a lot of these companies are not going to have the run rate, necessarily, to build out and fill out a marketplace before some of the larger guys come in. I would assume that many of the larger companies in the cannabis space would love to have some of the supply chain and technology systems that already exist in the more traditional businesses, but that they can’t get them because those companies are saying, look it, I’m making X billions of dollars over the year and you’re worth maybe a few million bucks to me right now. And so therefore, the risk isn’t worth it.

Long term, I think that whole industry has a lot. So there are a lot of companies, but in that space I think there’s a massive amount of, I don’t know what the right term is, you know, but where you’re having a regulatory framework that could immediately change. It could make a whole bunch of companies very valuable from a takeover point of view, but the question is, have they grown to that big of a size that they’re all of a sudden going yeah, I’ve got to absolutely have them. And that’s what I just don’t know, because now you’re asking, you know, you’re trying to bet on which way a cat’s about to turn.

James West:   Right.

Colin Fisher: You know, you just can’t do it.

James West:   Okay, so what have you got for us in terms of new technology names that we can look at this week? This month? This quarter?

Colin Fisher: I don’t really change a lot. I don’t – listen, it’s not like I have a hot thing this month and a hot thing next month. You know, I’m a bit of a longer term investor; again, that’s informed a lot by investing in private companies. You have to have a different frame of mind. So again, I still like ILOOKABOUT; I think that’s going to be, once the, whatever the, you know, they’ve announced an LOI with Clarocity; whatever happens with that, and whenever that finalizes and the deal consummates, I think that’ll be a very interesting company.

I still think AcuityAds is viciously undervalued. I mean, this was a company that in Q4 of last year did almost all of the same revenue that they did in 2017, and it was 108 percent year-over-year same quarter – 108 percent same quarter year-over-year growth, and they were at 10 or 12 percent EBITDA margins, which they never had before. So obviously they’ve now grown, and they’re got a massive amount of revenue growth, but they’ve also got an even bigger amount of profitability. And so –

James West:   And how has the share price performed?

Colin Fisher: Relative to where it should be, I think it’s viciously undervalued at this point, only because it had a very strong run in terms of revenue and earnings, but the marketplace hasn’t really rewarded it. So I think there’s, you know, the asymmetry of information and the efficiency of the markets in Canada around technology are particularly inefficient.

James West:   Right.

Colin Fisher: You know, so you talk about crowded trades or uncrowded trades and efficient markets and inefficient markets; I think in Canadian technology you have the benefit of both A), uncrowded trade – it’s not like tons of dough is running after every deal, and additionally, you have an uncrowded trade and because of that, it’s a relatively – quite inefficient marketplace.

James West:   Right. So AcuityAds, I mean, the last time I looked at this share price, and I’m looking at it now on my NDI here, I hope it’s functional, looks like maybe it’s not – but AcuityAds was trading at over $4.00, wasn’t it? And now, so despite this great sort of improvement in economics, it’s still, the price has fallen.

Colin Fisher: Yeah, so a couple of things that happened was, there was an industry-wide problem. In fact, actually, one of the biggest trades I ever missed was AcuityAds pre-announced the problem with their revenues and I didn’t short Rubicon. Probably the dumbest thing I’ve ever done in a long time. And the reason is, they’re almost an identical businesses. Rubicon got absolutely decimated because of the exact same problem, so imagine being in an orgy, everybody’s got chlamydia and you’re assuming somebody else doesn’t have chlamydia. You’re in an orgy; they’ve all got it.

James West:   Right. [laughter] Everybody’s got it tomorrow.

Colin Fisher: So you know, when you look at the, like a Rubicon, all of a sudden it was, you know, that was a short. But anyway, what happened was, back then, you know, you had a very, I think the price got ahead of itself at the forefront. I think it got up to 5.10 or something like that; I think it got ahead of itself. Without the industry issue it would have traded sideways; with the industry issue, it got just smoked. But I think now, if you look at that, in my opinion, this stock from a revenue point of view, from an EBITDA point of view, is five or six times above where it was at $5.00. And my estimation is that this is a stock that could easily, based on its current revenues and its current earnings, make it to $5.00 by the end of the year and still be a relatively strong value. Like, it’s not way ahead of itself or anything.

James West:   Yeah. Certainly the pattern is, you know, new high, consolidation, higher low, higher high, higher low…so I mean, it seems to be re-capturing lost ground, here.

Colin Fisher: 100 percent.

James West:   And so technically it looks great, but you’re saying fundamentally it also has everything it needs under the hood to recapture its former glory.

Colin Fisher: Oh, I think, I mean, it’s way ahead of anything it’s ever done in the past by a factor of, I think, two or three.

James West:   Really? Okay, well that’s – now, that is some downright valuable input, there, Colin! [laughter] So what other companies in your universe have that same kind of potential, do you think?

Colin Fisher: So ILOOKABOUT is the other one. If you, you know –

James West:   What’s the symbol on that one?

Colin Fisher: ILA.

James West:   ILA on the CSE?

Colin Fisher: No, it’s on the V.

James West:   Oh, that’s great. Oops, let’s see here. All right.

Colin Fisher: So what I like about this is, you have Gary Yeoman, who was the – he founded Altis Group.

James West:   Okay.

Colin Fisher: Altis Group is a multi-billion-dollar, or a billion-dollar company now. So you have a guy who’s built a billion-dollar company, planted all the seeds for that company. He was also one of the foundational investors in Real Matters, which is now, I think, a billion-dollar company. So this is a guy who understands real estate technology. So I like to bet primarily on the jockey as much as possible.

They’re making an acquisition of Clarocity assets, and the, I think when – and only because I’ve had the, this is all public knowledge, but if anybody cares to run it you can see it – is that post-consolidation of two publicly traded companies with all their information out there, at $0.30, stock, I think, is $0.20, they’re trading at 1 times enterprise value to revenue. All of their competitors, or anybody similar, is trading at 5.2, on average.

James West:   Hmm, why the disconnect?

Colin Fisher: Oh, because it’s sub-$50 million. So the number of people who understand it, the number of people who know that Gary Yeoman was the founder of Altis, is very few. I mean, it’s just an incredible – like, when I talked about inefficient and not a lot of dough chasing it, so this is one of those where what I like is that the volume has continued to pick up. When volume goes up, stock goes up. There’s only about 25 percent of the free trading, of all the shares that are free trading, and that’ll be the same pre- and post- the deal, which is rare. Actually, the percentage basis goes down, but it’s the same 25 million shares that are going to be free-trading post the transaction.

So I think it’s going to be incredibly accretive, the acquisition, for ILA, and I think it’s going to be incredibly difficult to start to get shares post the deal, once it actually gets out there.

And again, they started a little bit of a campaign, they were down in Barbados, they were at Cantech, they were at our event, but the deal hadn’t even been thought about when they were at our event in October of last year. Our event’s coming up October 3^rd, 2019.

James West:   October 3^rd, 2019, and again, you have to be an institutional guy to get in to that?

Colin Fisher: No, no. We’re a high net worth individual or a larger advisor.

James West:   What about a low net worth individual? [laughter]

Colin Fisher: Sure, or a low brow.

James West:   I might be a low net worth individual by then.

Colin Fisher: I don’t think so.

James West:   All right, Colin, let’s leave it there for now. That was a great contribution as per usual. We’ve got to get you back more often, but you know, we’ll work on that.

Colin Fisher: Work on that.

James West:   But, thanks for joining me today.

Original article: StableView Asset Management President on Viability of Cannabis Technology Companies

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