The cannabis revolution is in gear in a big way to kick off 2021. We began suggesting the space could be set to power into a fresh cyclical bull market since September of last year when we started looking for a run into and out of the November election, when a multitude of new states would likely shift toward greater legalization.
They did. It did.
In short, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has rising over 65% in the past three months. One stock that might finally be ready to get on the radar for market participants – and potentially make up for lost ground – is Sugarmade Inc (OTCMKTS:SGMD), a rapidly growing force in California’s vertically integrated cannabis space.
The company has become a leader in the cannabis delivery space and is quickly working to glom together an internal vertical that solves costs associated with supply chain dynamics in an industry that penalizes companies unable to fuse cost structures to a vertical supply solution. Based on recent company communications, we could see coming announcements that present such a solution.
To help put that story together, the company recently put out an insightful letter to its shareholders that suggests this vertically integrated path is precisely what lies ahead, with further end market expansion to boot.
Outward and Upward
Sugarmade Inc (OTCMKTS:SGMD) is an interesting player. The company made huge gains in its topline growth last year due its investment in BudCars, a leading force in the cannabis delivery space. That investment happened very early in the year and included a lot of operational hands-on day-to-day investment by SGMD management to help foster growth.
Throughout the year, that paid off handsomely, with massive month-over-month jumps on the topline on the order of 50-100% regularly.
Now, the company appears ready to focus on the next stage of its plan: to verticalize its in-house supply chain to optimize margins.
To wit, as noted in the shareholder letter distributed yesterday, Jimmy Chan, the company’s CEO, noted:
“We would like to express our gratitude for your patience and commitment as we continue to steer Sugarmade into what we hope will be a leadership role in the rapidly growing cannabis marketplace as a vertically integrated farm-to-door solution for cannabis consumers.
“2020 was a landmark year for Sugarmade as we established, through our capital and operational investment in Budcars, a cannabis delivery service, a distinct and increasingly vertical model for delivering top cannabis-based products to a growing marketplace. We believe this marketplace remains insufficiently supplied and inconsistently accessible for consumers who want more reliable quality and greater convenience.”
That suggests a clear focus on verticalizing the model to a far greater extent. The letter goes on to detail some of the advantages:
“In addition, we continue to verticalize our model, creating a full farm-to-door structure that expect to produce high-quality branded cannabis products positioned in a vertical in-house supply chain. We expect that this will provide Sugarmade with optimal margins. We believe that we will also be better able to make use of 280e tax deductions related to production once we have a more vertical structure in place… With our vertical vision coming together, our advantageous brand development positioning, and an increasingly promising macro context, we are very excited about the year in front of us.”
The Spoils
Sugarmade Inc (OTCMKTS:SGMD) is interested in getting more for less. That’s the point of all strategic planning at the end of the day – it’s about growth, sure, but the big point is the eventual bottom-line pay-off.
The company notes that verticalizing its supply chain can introduce wider margins and critical efficiencies driven by basic cost and tax-related themes. This includes a better process for taking full advantage of tax incentives available to companies in the space. It’s hard to deduct for production of goods when you aren’t producing the goods.
And it should be reinforced that the world continues to get kinder and kinder to cannabis producers as the footprint of legal cannabis consumers continues to widen on a legal basis. That’s how all industries evolve over time. Cannabis is starting to drive serious tax revenues for states and possibly for the federal government over time. That puts a big carrot in front of lawmakers to nurture this golden goose. It’s a virtuous circle at this point, and it’s driving money into the space, which holds the potential to benefit the smaller players like SGMD who can show growth and an increasingly promising model.
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