Charlotte’s Web [TSX: CWEB] (OTCQX:CWBHF) and CV Sciences (OTCQB:CVSI), the two largest publicly-traded companies in the CBD space, are locked in a tight race to become the leader of the nascent industry. Both have been growing quarterly revenues by double to triple digits on a YoY basis and have added experienced outsiders to their respective management teams.
While we are bullish on both companies, we believe that the valuation gap between the two has grown too large and is due to narrow in the coming months. While CVSI does have a poor track record when it comes to certain aspects of SEC compliance, we believe the company has moved on from its past and is focusing on taking advantage of the opportunity to become a leader in one of the fastest-growing industries in quite some time.
We will provide a comparison of the two companies below and explain why we believe that the valuation gap between the two should narrow.
CV Sciences is a Las Vegas-based company that is involved in the production and sale of CBD-infused products under its brand PlusCBD. These products include topical ointments, gummies, tinctures (concentrated liquid herbal extracts), capsules, and pet products. The company also has a specialty pharmaceuticals segment that is focused on developing pharmaceutical uses for cannabidiol.
CV Sciences markets CBD products including topicals, gummies, tinctures, and others through 5,300 retail outlets in the United States and through a website (pluscbdoil.com).
Charlotte’s Web is a Colorado-based company that is involved in the production and sale of CBD-infused products. These products include topical ointments, gummies, tinctures (concentrated liquid herbal extracts), capsules, and pet products.
The company, formerly known as Stanley Brothers Inc., was started in 2008 by seven brothers who became interested in the medical benefits of marijuana after their uncle was diagnosed with cancer.
Charlotte’s Web also markets similar products at 7,871 retail outlets across the U.S. and through a website (charlottesweb.com).
Product selection and availability are largely the same between the two companies, although we feel that CWBHF has a more aesthetically appealing website and branding. On the other hand, prices for Charlotte’s Web products tend to be a bit higher.
Both CWBHF and CVSI have grown revenues at a brisk pace over the past few years, per the chart below:
|Sales (in thousands)||2016||2017||2018||Q1’19||Q2’19|
(Source: SEC filings)
Charlotte’s Web outperformed CV Sciences in 2017, as it nearly tripled revenues from $14.7 to $40 million. However, CVSI more than doubled revenues in 2018 from $20.7 million to $48.2 million, narrowing the gap between itself and CWBHF. The “Ratio” row in the above chart shows the ratio of CWBHF revenues to CVSI revenues: this ratio climbed to 1.9 in 2017 (when CWBHF’s revenues were almost double those of CVSI) but has since fallen to ~1.45.
Both companies have grown very quickly by capitalizing on the “CBD craze,” which has seen a large spike in public interest in the compound. The Brightfield Group, a market research firm that specializes in the space, expects annual CBD sales to reach $22 billion by 2022.
Investment bank Cowen & Co. forecasts annual CBD sales to reach $16 billion by 2025, which it admits is a conservative estimate. Although CWBHF and CVSI are direct competitors, both have room to grow if they can maintain their share of what is clearly a large and quickly growing pie.
Capitalization and Valuation Overview
Below is a snapshot of each company’s capital structure and market valuation:
(Source: Yahoo Finance)
Charlotte’s Web is trading at an enterprise value of $1.79 billion, compared to $291 million for CV Sciences, which means that CWBHF’s enterprise value is 6x larger than that of CVSI. Both companies have clean balance sheets with net cash positions. Charlotte’s Web is currently trading at an EV/Sales multiple of 21x, while CVSI is trading at 5x EV/Sales.
Note: Several websites, including Yahoo Finance, quote CWBHF’s market capitalization as ~$700 million. This is incorrect and based on the false assumption that CWEB only has 39 million shares outstanding. This is because the company has 138,322 proportionate shares outstanding, which are convertible to common shares at a ratio of 400:1. These proportionate shares are mainly held by shareholders of Stanley Brothers Inc. (Charlotte’s Web’s previous incorporated name). Page 2 of the company’s prospectus provides more details about this.
Reasons for Valuation Gap
We believe shares of Charlotte’s Web are more expensive than those of CV Sciences for the following reasons:
- Charlotte’s Web is more reputable and well-known: CWBHF was introduced to the mainstream public in 2013 when the Stanley Brothers (founders of Charlotte’s Web) cultivated a high-CBD, low-THC strain of CBD that helped stop the epileptic seizures of 5-year-old Charlotte Figi. The brothers (and CBD) gained nationwide recognition and were featured in a 2012 documentary by Sanjay Gupta (CNN’s chief medical correspondent).
- Charlotte’s Web is listed on the Toronto Stock Exchange, a major exchange and the largest in Canada. This provides the company with an added layer of credibility and peace of mind for investors. CVSI is listed on the OTC pink sheets (OTCPK).
- CWBHF is also generating more revenue than CVSI. 2018 sales clocked in at $69 million, versus $48 million for CVSI. This has likely led to greater interest in Charlotte’s Web as it is currently the leader in the CBD industry.
- Charlotte’s Web products also have greater market share than CVSI, per the graph below:
(Source: Brightfield Group)
We do agree that Charlotte’s Web should trade at higher multiples than CV Sciences: it is generating more revenue, has a greater retail footprint, and has a brand that is better known. However, we do believe that the valuation gap between the two companies is expensive. Charlotte’s Web generated just 45% more revenue than CV Sciences in 2018, yet its shares are currently valued at nearly 6x those of CVSI.
This valuation gap should continue to narrow over the coming months as investors start to pay more attention to CVSI and note its relative cheapness.
Risks to Investing in Charlotte’s Web and CV Sciences
The following is a list of risk factors that investors should carefully consider before investing in the CBD industry as well as the two companies described above:
- Intense competition – there are a large number of publicly and privately-traded competitors in the CBD space. Several of these competing brands are shown in the image in the prior section. This report from the Brightfield Group is useful in learning more about the industry.
- Regulatory concerns – The Food and Drug Administration is currently working on establishing a regulatory framework for the CBD industry – if the government imposes strict restrictions on selling CBD products, this will lead to slowdowns in the top-line growth of Charlotte’s Web and CV Sciences.
- Securities fraud allegations – This concern applies only to CV Sciences, which has been dogged by a number of securities fraud allegations. Below is a quick summary: A 2017 lawsuit filed by the SEC alleged that Michael Mona (founder and former CEO of CVSI) engaged in a fraudulent transaction in January 2013 whereby he used a shell company called Foreclosure Solutions, Inc. to purchase a company called PhytoSPHERE Systems with shares of CVSI (then known as Cannavest Inc.). The transaction was started at a value of $35 million, inflating CV Sciences’ balance sheet. This lawsuit was resolved in 2018.
While there is a significant amount of uncertainty surrounding the space, we believe that CBD companies are worth a close look from investors interested in getting involved in the industry. Although Charlotte’s Web is the industry leader, we believe CV Sciences also looks attractive given its relatively cheap valuation and significant growth.
We will keep readers posted through articles on this site and welcome all comments and feedback.
Disclosure: I am/we are long CVSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.