2023-03-21 08:27:17 ET
Summary
- WM Technology reported another difficult quarter as prime dispensary customers remain under pressure.
- The cannabis technology company targets double-digit adjusted EBITDA margins despite the tough environment.
- MAPS stock is cheap trading below 1x sales targets.
The cannabis sector has gotten so bad that a promising tech provider like WM Technology ( MAPS ) is somewhat in survival mode. The company remains adjusted EBITDA positive to survive until the cannabis market improves. My investment thesis remains Bullish on the stock, though the company has a lot of headwinds making for a potential tough year ahead.
Major Headwinds
For Q4, WM Tech. reported revenues of $49.3 million , down 9% from last year. The company continues to sign up new customers, but the existing cannabis dispensaries using their services are struggling.
On the Q4'22 earnings call , CEO Dough Francis highlighted the myriad of issues harming the cannabis sector:
Like many companies, we are facing challenges in the current environment. Inflation is eating into consumer and business spending power. The higher cost of capital is slowing growth, and the fear of a looming recession is front and center on folks minds. The cannabis industry is facing additional headwinds as we deal with over regulation, the slow rollout of new licenses across the country, a lack of government support combined with high taxes from all levels of government, commoditization of cannabis products, frozen capital markets, limited access to banking, and a thriving black market.
WM Tech. continues to see a high level of customer interest, but a lot of customers have pulled back from monthly spending due to the above economic issues and lack of capital. The company saw paying clients reach a new high of 5,689, up 19% from last year. The problem is that average monthly revenue collapsed $989 from last Q4 to $2,888.
The paying client numbers mostly offset each other as California remains the primary market with 54% of Q4 revenue. The inability of non-California states to execute on plans for expanding license holders hasn't helped the industry, especially a business like Weedmaps focused on SaaS offerings where additional dispensary licenses expands the potential customer base.
WM Tech. hasn't always provided this level of detail, but the biggest issue for the business is the advertising portion of revenues. The SaaS subscriptions technology business is still growing slighting reaching $13 million in the quarter while Featured and deal listing sales fell 15% YoY to only $33 million.
The business was running at a nearly $200 million annualized revenue run rate. WM Tech. guided to seasonally low Q1'23 revenues of $47 million with the business stabilizing at these levels with adjusted EBITDA at $4 million.
The best news is that the company has adjusted the costs structure and returned the business back to adjusted EBITDA profits at these lower quarterly revenue rates.
Keep An Eye On Cash
WM Tech. ended the quarter with a cash balance of only $29 million. The business was adjusted EBITDA profitable in the quarter at $3.9 million, though bad debt cut the total to only $1.5 million.
The problem is that the company continues to burn cash on a quarterly basis and spent $16 million on PP&E for 2022. With adjusted EBITDA so close to breakeven, WM Tech. only has to spend extra money on one-off costs, such as severance, to end up burning cash.
The stock valuation has dipped below $150 million with 148 million diluted shares outstanding and the stock below $1. WM Tech. has plans to be cash flow positive for the year starting with a $4 million adjusted EBITDA target for Q1. A good start considering Q1 is the seasonally low quarter and business jumps in April due to the 420 holiday.
The cash concern will disappear, if WM Tech can deliver on goals for double-digit EBITDA margins. Since the company doesn't have any debt, the access to additional capital shouldn't be difficult, just possibly dilutive to shareholders.
Elevated Risks
As with any stock below $1, WM Tech. faces a high-level of risks. Any failure of the company to reach cash flow positive would lead to dilutive capital raises.
The biggest problem is the struggles in the cannabis space with states like New York and New Jersey failing to expand license holders as promised. In addition, the cannabis market is highly competitive, though prime competitor Leafly Holdings ( LFLY ) continues to struggle even more than Weedmaps.
The current weakness in the sector and lack of capital could provide a tremendous benefit to WM Tech., but some weaker competitors could actually offer discounted services in a last desperate move to grab market share.
Takeaway
The key investor takeaway is that WM Tech. offers an attractive valuation despite the difficult cannabis space. Though, an investor must be willing to lose their capital and should spread their speculative cannabis investments amongst multiple beaten down sector stocks. The owner of Weedmaps offers one of the better risk/reward opportunities when the sector turnaround.
For further details see:
WM Technology: Survival Mode For Now