Detailed Financials Show Cannabis-Focused Media Company Boosted by Aggressive Growth in Digital, Events – At a Palatable Valuation
Everyone has a hankering for cannabis these days, from medical patients to the likes of beer giants Constellation Brands and Molson Coors. Now, investors have a chance to own a piece of the oldest brand in the industry: High Times Holding.
The parent of High Times magazine and organizer of legendary Cannabis Cup events is offering up to $50 million in a Regulation A+ IPO. The obvious appeal of any cannabis-related company is the recent rapid legalization of marijuana – already in 29 states and soon all of Canada for recreational use.
That will mean more demand for cannabis-focused media content in the form of digital and print, not to mention events and paraphernalia. And the High Times brand is known even among those who don’t currently use marijuana, suggesting its value could increase as more non-users decide to consume cannabis once it’s legalized.
But a careful look at a new High Times investor presentation available at RegAResearch.com reveals another opportunity: It’s a stodgy media company in the midst of a rapid transformation into a digital powerhouse. New owners who took over in the second quarter of 2017 have already begun to address much-needed change. And with the influx of fresh capital from the IPO, the growth strategies at High Times will be kicked into an even higher gear.
First consider the company’s online presence, which only began in 2008 when High Times launched an online version of the magazine, founded in the 1970s. It’s clear from the numbers that the digital assets weren’t getting the attention they deserved: Digital media revenue tumbled from $1.2 million in 2014 to just $400,000 in 2017, according to company filings. That’s while digital advertising in general has been booming.
Now, High Times is making digital media a top priority, with revenue expected to grow from $1.2 million this year to $10 million in 2019. How? There is plenty of low-hanging fruit such as harnessing its social media following and offering ads across multiple formats including video. The company has hired dedicated staff to focus on those efforts.
Importantly, some major companies like Facebook and Google currently won’t run cannabis-related advertisements. Restrictions are also very tight in Canada, where High Times is among a small number of publishers able to run marijuana ads. So long as that dynamic lasts, High Times could have a stranglehold on the cannabis advertising market across its media platforms.
There are signs of success already. Since the ownership change last year, there has been a dramatic increase in both visitors to High Times.com and the number of mentions on Twitter, according to third-party data from Sentieo.
Sentieo Data on Hightimes.com Weekly Page Views
Sentieo Data on Weekly Twitter Mentions of High Times
Another neglected area of neglect has been licensing. Despite the company’s incredibly strong brand power within the cannabis world, licensing revenue declined from $913,000 in 2014 to $252,000 in 2017. But High Times expects the figure to rise to $1.3 million this year and $4.6 million in 2019. Such revenue should have very high margins because licensing deals are normally structured as an upfront payment with a royalty that’s a percentage of another manufacturer’s sales.
There are several revenue drivers behind the surge. Logo clothing is an easy opportunity to sell items like t-shirts and hoodies either online or at brick-and-mortar retailers. There are also thousands of gas stations and smoke shops carrying various pipes and other paraphernalia that could be marked with the High Times logo. The company also owns the 420.com domain, where it may sell a range of products directly to consumers when the site launches.
The largest – and perhaps most straightforward – driver of new revenue is the addition of more events including its famous Cannabis Cup trade show. While most people know the company best for its publication, events accounted for 76% of revenue in 2017.
Revenue from events has gone sideways for the last few years but the company plans to increase the number of events from 14 in eight locations last year to 21 events in 15 locations in 2019. The addition of new events is made easier by the new capital at the company’s disposal along with legalization in more states.
And the events aren’t confined to the U.S. Among the 21 events planned, four will be in foreign countries and one will be onboard a cruise ship. The company is taking its ambitions abroad seriously, even recently naming former Mexican President Vicente Fox to the board of directors. Someone with vast experience in international relations should help clear the way for a smooth expansion into foreign markets.
Beyond all these in-house initiatives, the company has firepower for acquisitions. By purchasing other publications in the cannabis industry, there is scope to achieve cost-saving synergies in areas such as advertising sales. For instance, the company recently acquired Culture, a major publication focused on medical cannabis, for $4 million in stock.
All this adds up to impressive growth in revenue and profit. Sales are expected to rise 59% to $23 million in 2018 and 133% to $54 million 2019. And while the 2019 growth may be a spike above its long-term trajectory, there is plenty of room for expansion.
Indeed, estimates for the size of the Canadian market suggest a rosy picture for the U.S. According to Cowen analyst Vivien Azer, Canada’s legal cannabis market may reach $12 billion in 2025, roughly double the current illicit market. Considering the relatively small population size in Canada, the potential in the U.S. is enormous.
Are High Times shares good value for investors? Assume the company sells $25 million in IPO shares, or half the total potential size, and it also effects a planned merger with a shell company called Origo, generating another roughly $17.5 million in cash. The surviving company will have a market capitalization of $274 million and an enterprise value of $277 million, according to RegAResearch estimates. That indicates a multiple of 40 times 2019 earnings and an enterprise value of 30 times 2019 EBITDA.
At first blush, those multiples aren’t cheap. But considering the dominance High Times has in its industry, it may find itself on the right side of a winner-take-all outcome. And as we have seen with Constellation Brands, which bought a stake in cannabis cultivator Canopy Growth Corp., deep-pocketed buyers are hungry for marijuana investments. Surely the company will be on the radar of larger media companies looking for high-growth acquisitions.
And remember, High Times doesn’t produce any cannabis but profits from its various business surrounding it. For investors seeking exposure to the category, High Times is a smart way to join the party.