High Tide is our Top Pick for Q4, says Echelon

Expectations are sky-high from Echelon Capital Markets for Canadian cannabis retailer High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI). Echelon analyst Andrew Semple delivered a report to clients on Tuesday where he reiterated a “Speculative Buy” rating and $12.00 target on the stock, good for a projected one-year return of 480 per cent.

 Semple commented on the recent announcement by High Tide, where the Calgary-based company said it has started selling cannabis seeds in the United States through its wholly-owned subsidiary e-commerce platforms Grasscity and Smoke Cartel.

High Tide said it made the move after the US Drug Enforcement Agency’s determination earlier this year that cannabis seeds fall under the legal definition of hemp and can thus be sold in the US. The company’s press release quoted an Allied Market Research report saying the cannabis seed market generated an estimated US$1.3 billion in sales in 2021 and is projected to hit US$6.5 billion by 2031.

“This new business venture will greatly expand our US customer base, which already sits at 2.4 million through our ancillary cannabis business lines, and sets us up well to take advantage of federal legalization in the United States when it comes,” said High Tide President and CEO Raj Grover in a press release. 

“This further diversification into the U.S. seeds market also strengthens our Canadian discount club model, as this new vertical is expected to generate significantly higher gross margins than our core brick-and mortar-business, which will help us continue to offer unbeatable prices to our Cabana Club members,” he said.

Semple said he views the announcement positively, pointing to the prospect of higher gross margins and the fact that cannabis seeds makes sense for HITI’s e-commerce business, as they represent a small and light but valuable and therefore cost effective product to ship, while the company’s already-large e-commerce customer base — for example, GrassCity.com generated almost 24 million page views over the last 12 months and 3.8 million users —will reduce customer acquisition costs. 

“We believe this represents a low risk and capital-light method of continuing to expand into the US market by making full use of existing e-commerce infrastructure and healthy consumer traffic,” Semple wrote.

Semple estimated that a one per cent conversion rate on GrassCity’s 3.8 million user base and a $50 average basket size would represent sales of $1.9 million per year and an incremental EBITDA contribution of about $0.9 million. At the same time, the analyst said there is not enough visibility on the vertical’s revenue potential presently and thus has not adjusted his forecast. Semple calls for full 2022 revenue and adjusted EBITDA of $349.2 million and $13.6 million, respectively, and 2023 revenue and EBITDA of $465.4 million and $21.8 million, respectively.

With the update, Semple reiterated a fourth quarter Top Pick status for High Tide. 

“With nearly $30 million of cash on hand after raising debt and equity capital earlier this year, High Tide is well capitalized to pursue additional growth initiatives in the new year including organic store openings and likely new M&A,” he wrote.