News of the Week (December 20-23)

SoFi Technologies; Ayr Wellness; CuriosityStream; Tattooed Chef; The Boeing Company; Ozon; Cannabis News; My Activity

Wishing you all a happy, healthy New Year and a very merry Christmas to those celebrating.

1. SoFi Technologies (SOFI) — Federal Student Loan Pause Extension

The Biden Administration extended the pause on student loan payments to May 1, 2022. It had been set to expire next month but the spread of the Omicron variant led to the pivot.

This same pause cost SoFi $40 million in 2021 revenue (4% of sales) yet the company was still able to raise its original 2021 guidance thanks to strength from other products. Based on the moratorium now expected to last 4 months into next year, this piece of news will cost the company at least $13.3 million in 2022 sales — and likely more as it was poised to benefit from the payment backlog unwinding.

This is the kind of headwind that I get excited about and embrace with share accumulation. Why?

1. It’s temporary.

2. It has nothing to do with the utility of SoFi’s product suite.

3. It’s a payment pause, not payment forgiveness meaning this is a revenue delay more than anything.

The company has been able to weather the storm admirably to date — and this too shall pass.

Click here for my broad overview of SoFi’s business.

2. Ayr Wellness (AYRWF) — Ayr Head of Strategy & M&A Jamie Mendola Interviews with Mindset Capital

“American Cannabis is the opportunity of a lifetime. I’m betting on it with my career and capital. Nobody on the management team has sold a share of stock since we became a public company. No senior people have left.” — Mendola

On the EBITDA Guidance Reduction:

“The reality is that there are a couple markets with some regulatory delays. In states like Massachusetts we have an amazing retail portfolio that’s currently all medical or under construction. Those will all come online in 2022 as recreational stores but we’re just not going to get a full year contribution which we originally anticipated. We also have big cultivation expansions in Massachusetts, Arizona and Florida. A combination of Covid-19, construction and other delays has pushed those projects 2-4 months behind schedule. That’s about two-thirds of the softness.”

“The other third is industry maturation. There is some pricing compression in wholesale and retail that is not unique to Ayr. I think we are holding our own and taking market share to cushion this because of our quality of product. In almost every market, per-pound wholesale prices are 10-15% lower and I think that will continue a bit.”

Mendola talked about the well-capitalized Multi-State Operators (MSOs) building production capacity ahead of expected recreational roll-outs in key states. As this reform is still yet to come, the front-loaded expansion and coinciding supply are creating some mild pricing pressure on wholesale. This is especially happening in high-margin states like Pennsylvania where MSOs can afford lower margin sales today to prepare for recreational market share tomorrow. As recreational programs go live (he thinks in the next 18-36 months), this issue will resolve itself.

“Margins across the industry are quite attractive but I think the days of 40-50% EBITDA margins are going to get tougher and the industry will settle in the low-to-mid 30% range for good operators.”

Mendola sees margin compression in the future (I agree) as competition stiffens. Considering these are CPG companies at heart operating at 50%-60% gross profit margins vs. 40% for a firm like Mondelez — there is plenty of room for margin compression with these still being remarkably successful enterprises. Mondelez also features an EBITDA margin of 20% which makes run-rate expectations of a 30%-35% EBITDA margin for Ayr quite impressive to me.

We also have to remember that while gross and EBITDA margins will likely continue to compress, cash flow and profit margins would be boosted by SAFE Banking legislation, 280E reform or up-listing. There are margin tailwinds too.

On Liberty Health and Florida:

Florida is the only large state with forced vertical integration meaning a retail shop can only sell what it actually grows and produces — no wholesaling (and so better margins). This means production issues flow all the way through to retail and Liberty’s (the Florida grower that Ayr bought) production issues were bountiful.

“You can start to see the results [of our Liberty acquisition] looking at the state-level data. The trailing 4-week sell-through of both oil and flower is 2-4 times better than it was just prior to our acquisition this February. We are on track or better than on track relative to the expectations we had for Liberty.”

As a reminder, Ayr’s expectations for Liberty are for the assets to be worth more than the entire enterprise value of the company today. Factors such as the large population, no recreational legalization to date and the massive tourism industry in the state all contribute to this bullishness. Mendola was asked if he thinks the operational improvements and recreational legalization could bring Ayr’s stores to $8-$10 million per location vs. $2-$3 million today — and he didn’t push back. With 80 stores planned, Ayr could be doing nearly as much annual revenue in Florida alone as its enterprise value today — when thinking about it this way, the bold claim Ayr is making seems quite realistic.

Liberty was carrying 2-3 flower strains 2-3 days per week with competition having dozens of options every day.

Ayr’s philosophy is to continue to aggressively roll out stores before cultivation is where it wants it to be. Why? They believe there’s a current land-grab happening that’s being rushed by local jurisdictions beginning to cap dispensary counts per grower. There’s no guarantee store openings will be allowed down the road — so Ayr is opening them right now. It wants to get to 80 stores and currently has 43 open with 15 more planned. Cultivation is still catching up to its retail growth which is why productivity is still lagging. Ayr’s store productivity in Florida still greatly lags Trulieve but that gap should begin to close going forward.

Ayr will re-brand Liberty stores to Ayr at the beginning of next year. It wanted to wait until product selection and quality was in line with its expectations to make the change. This also means that we can infer it expects cultivation to catch up to retail store growth early next year.

Ayr had an 8.9% market share of total THC sales in Florida as of this week vs. 5.5% when the Liberty acquisition closed in February of this year.

Click here for my broad overview of Ayr’s business.

3. CuriosityStream (CURI) — New Bundle

CuriosityStream debuted its Smart Bundle this week for $69.99 per year. This subscription includes access to its own content and 5 other services: Tastemade+, SommTV, Topic, One Day University (CuriosityStream-owned) and Nebula (a CuriosityStream investment).

As I’ve said many times before, this next quarter will be make-or-break for CuriosityStream. The company presents immense upside as well as immense execution risk.

Click here for my broad overview of CuriosityStream’s business.

4. Tattooed Chef (TTCF) — Belmont Confections

Tattooed Chef closed its acquisition of Belmont Confections. The company announced the purchase in October for $18 million in cash and stock. Belmont makes ambient nutrition bars and snacks thus offering more signs of Tattooed Chef’s planned entrance into the space.

The company gets 47,000 square feet of production space with equipment and trained team members in place. Tattooed Chef believes these assets will contribute an incremental $100 million in annual revenue by 2024.  In contrast to most major plant-based brands, Tattooed Chef is actively building out its own manufacturing facilities rather than relying on the expensive co-manufacturing market.  This should result in better margins and competitive staying power long term.

5. The Boeing Company (BA) — UPS Order

Boeing announced that UPS ordered 19 767 Freighters to be delivered from 2023 to 2025. The decision was due to “operational efficiency and payload capability” and comes at a time when air cargo is booming with the proliferation of e-commerce.

Boeing is expecting air cargo demand to expand in excess of GDP growth at a 4% clip through 2041.

6. Ozon (OZON) — Geopolitical Battles

Russia continues to accumulate troops at the Ukrainian border prompting growing fears of a planned invasion. This is likely weighing on Ozon’s stock as any tension between Russia and the West makes things like de-listing slightly more likely.

I have continued to accumulate more shares as the company now features a single-digit gross profit multiple, rapidly compounding revenues and top of mind brand awareness in a country with ample low hanging fruit to capitalize on. Still, these headlines will likely continue to hurt the company’s stock price and we all should be aware of that. These events do not impact my view of Russian e-commerce or how well-positioned Ozon is within it — that is why I am approaching the volatility and multiple compression with accumulation.

Click here for my broad overview of Ozon’s business.

7. Cannabis News

Maryland Lawmakers are quickly ironing out negotiations to add recreational cannabis legalization to the state’s ballot for 2022. Its politicians seem ready to put legalization in the hands of the voters and — based on previous results in other states — that should mean Maryland flips rec in the coming years.

Click here for my broad overview of American Cannabis regulation.

8. My Activity

I added to Ozon during the week. My cash position currently sits at 13.3% of total holdings.