The Motley Fool

Why This Pot Stock Might Just Have the Best Business Model

Image source: Getty Images

When it comes to building strong, sustainable businesses, cannabis companies often don’t have terribly good track records. Canopy Growth Corp (TSX:WEED)(NYSE:CGC) is a great example of a situation where sales growth alone is not enough for investors to ignore horrible losses.

The company’s growth, which turned it into a $20 billion stock at one point, also led to its downfall.

While Canopy Growth is still a formidable cannabis stock — and one of the leaders in the industry — its rapid expansion and aggressive strategy has resulted in a lot of cash burn and rising expenses. A big challenge for the company was that it wanted to enter the U.S. through any possible means.

Whether through hemp or a future deal with Acreage Holdings, there was a great deal of manoeuvring by the company to help demonstrate to investors its growth potential and gain any possible advantage.

It’s still too early to tell how well that strategy will work for the company, but for its former leader Bruce Linton, it didn’t pan out so well.

Is slow, sustainable growth the key to success in the industry?

One company that has followed a very different approach to Canopy Growth is Planet 13 Holdings Inc (CNSX:PLTH). Rather than expanding into as many locations as possible, the company has focused on developing its Las Vegas SuperStore into a massive tourist attraction in a city that’s a perfect fit to do just that.

While the company hasn’t been able to avoid losses, they’ve also paled in comparison to that of Canopy Growth. Over the past four quarters, Planet 13 has incurred a total loss of around US$10 million.

It’s a modest amount, and a big reason for that is the company isn’t spreading itself too thin. Although its sales hit just US$17 million in its most recent quarter, these are still the very early stages for Planet 13.

The company has been working on a model that it can replicate in other states. And we’re already starting to see some of that success. In August, the SuperStore averaged more than 2,000 customers per day, with an average ticket of more than $90.

The company isn’t content with that figure, however, as it seeks to build something that will be much more of a spectacle, a can’t-miss venue to visit.

Recently, it announced that it would be adding the Cannabition, a cannabis museum that will be part of the SuperStore location as well. It will feature the art, culture and history relating to cannabis and give visitors yet another reason to check out the location.

In the end, it’s all about drawing people into a store and then trying to convert those people into customers. Planet 13 has done a great job of that without having to break the bank.

And as it expands into other markets to try to replicate this success, it could prove to be a model that stands out from its peers in the industry both for its popularity and its financial strength.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor David Jagielski has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.