Rally On, Traders!

The "legal green" industry is only a few years old and already there's a wave of consolidation lighting up Wall Street and sending valuations through the roof. It's what makes consolidators like Massroots Inc. (OTC:MSRT) interesting right now.

After all, we live in a world where Canopy will pay up to $3.4 BILLION for a company that barely grossed $20 million last year. That's 160X revenue. It's huge . . . until you factor in the fact that the people who make Corona beer have already poured $4.2 billion into Canopy for just a 38% slice of the business.

Canopy sold $58 million in legal green last year. Do that revenue math and the beer barons paid about 190X in order to get into the game. To put it mildly, these are staggering numbers that show how wild this theme has gotten, how big the growth prospects are and how hungry for green Wall Street is right now.

Mighty Amazon trades at 4X trailing revenue. If it had even 1/10 the Canopy multiple it would be a $4 TRILLION behemoth and Bezos would be almost five times as rich as he is now.

So in that world we naturally look for relative "value," places where the market hasn't already bid stocks to the moon. MSRT just went forward with a merger of its own so it's a natural candidate . . . but wait, that deal looks like it's going down for something like 3X trailing revenue at best! Is that the sweetest bargain of our age or are these guys just smarter than the average green baron?

The answer might be "both." MSRT doesn't want to buy one of the Canadian green farms. They don't even want an extraction operation or a retail network. Their acquisition prospect is COWA Science Corp., which helps companies throughout this burgeoning industry manage their supply chain, deal with regulators, keep the lights on and otherwise run more efficient operations.

That's a smart angle.  As they say, in any gold rush it's the guy who sells the shovels and prospecting gear that really cleans up. Take that "legal green" boom that's sweeping the continent, state by state. The growers and the retailers do OK but there's a lot of competition for every ounce sold at every level of the industry chain. 

Think of how Levi Strauss started. You don't hear about the individual "miners" 150 years after the gold rush. But the name of the guy who sold them all their pants has become a $6 billion behemoth. Now translate that to the GREEN gold rush we have today and the MSRT parallel is obvious.

And here's the deal. COWA is already doing $1.5 million in annual sales. MSRT is paying at MOST 50 million shares to buy it, provided the revenue curve keeps ramping up. Here in start-up land, that's maybe $3.5 million in stock . . . or, of course, a whole lot more if those shares move in the right direction before the final milestone payments come up on the calendar.

Those milestones only authorize the whole $3.5 million if COWA can do an average of $2.5 million a year over the next three years. That's at best a 1.4X multiple, not even 1/100 of what the big Canopy deals are unleashing up in the stratosphere. 

Yeah, you could go with the herd and pay what the herd is paying for your taste of the green boom, but do you really want to do that? Revenue to revenue, dollar to dollar, investors could get 100 little COWA type operations for every Canopy-style deal. That's 100 shots on the goal. 100 lottery tickets.

The MSRT CEO can barely believe the math himself. Here he is in the latest press release: “Numerous companies in the cannabis sector are trading at multiples of 5, 10, and even 25 times forward annual revenues." He's getting in for about 1.4X forward, 2.3X trailing. 

And COWA is more than just another farm producing more plant matter than even Canada can consume. It's independent from the green map, it can go anywhere and work with anyone working in a jurisdiction where these products are legal. It doesn't need to buy farm land or burn hot lights in a warehouse somewhere in downtown Vancouver. Companies like that are the gold prospectors. Picks and shovels! The CEO again:

As providers of the products and services that companies need to operate and grow their businesses, MassRoots and COWA are and will be able to generate revenue and gain market share in every state in which the sale is regulated. 

Of course catching that opportunity means rubbing a few brain cells together. The COWA CEO is a scientist. He worked in oil and he knows how math works. He follows the MONEY.

That's why he built the business he did. We're looking at a complete shelf of solutions that people in other businesses take for granted:

* advertising (you need to be creative given regulatory headaches)
* packaging design
* product development 
* HVAC (a do-or-die necessity in the world of bright growhouse lights and hydration)
* office supplies, ingredient sourcing, etc. etc. etc.

MSRT thinks COWA can at least double that revenue rate and maybe QUINTUPLE in the foreseeable future just to earn out the sweetest incentives in the acquisition. On that basis, this deal can easily pay for itself at that point. From there, it's what we call accretive . . . good stuff!

And as a bonus, COWA has 50 clients already so MSRT gets a golden ticket to UPSELL those forward-thinking industry players. (By the way, you read that right. $1.5 million into 50 means each customer paid about $30,000 last year on average. How many hopefuls are there in this business? Thousands? Tens of thousands? The expansion opportunity hasn't even been scratched, just on the COWA side.)

What does MSRT have to upsell? That's the thing. They're no slouch in their own right. Even the COWA guys are salivating to think of the synergies on the horizon.

​​​​​​​The company first caught my eye for running an online directory service similar to what Yelp or LinkedIn operate in the established business world. Green retail can't promote itself on those platforms. They think they're above it, so fresh blood with new ideas has a gap there ready to fill.

There's already 1.3 MILLION downloads of the app so far. The audience is plugged in. It's practically a "green social network" in itself.

COWA customers can carve out a space there ahead of competitors. They can also differentiate themselves with other MSRT services. After all, who wants to be in a commodity business when you can be a star? This is already multi-BILLION dollar industry crowded with eager hopefuls with more ambition than acumen.

In the early stages all you needed was cash, a license and a storefront to open a store. Now that there are hundreds of stores in some states, ambition isn’t enough any more.

You need to think like an entrepreneur to make it work here in 2019. That’s where MSRT comes in. They’ve developed all the modern retail tools that store owners in other categories have been using for years.

Tools like loyalty programs. It seems like such a tiny thing, giving repeat customers perks and points. Turns out the clubs have probably saved the airlines over and over . . . it’s made them BILLIONS, literally a profit center.

MSRT has a loyalty program. They call it the WeedPass. At least 100 stores have joined the network in Denver and Los Angeles. No wait, that should be 140. The number actually jumped as much as 40% between press releases, a three-week period.

Yeah, 40 stores in 3 weeks. That’s how fast this program is spreading. The CEO is confident they’ll add “several hundred by early 2019,” which is, you know, NOW. In that scenario, expect a lot of news from MSRT on this front over the next few weeks.

That gets the clock ticking if you want to participate before the word gets out there on Wall Street. After all, this is finally a differentiated play on the Green World. Not just a me-too retailer or someone with oils or a farm somewhere. Finally a way forward.

And it’s definitely a way forward. MSRT wants to charge participating stores for membership in the program. Want to offer your best customers discounts and freebies? Pay a fee. Want to keep your customers from going elsewhere? Pay.

Right now the deal is simple. Spend $50, get a free movie ticket. Now that the program has gone digital with a points-based program in the works, flexibility increases. 

Say you’ve got a hot market and a consumer base that, let’s face it, doesn’t have the strongest attention span all the time. It costs more to attract these people. Retaining their loyalty costs even more.

It’s a kind of “frequent flyer” loyalty program where if someone in the right state spends enough, they get free movie or concert tickets. You know the target audience LOVES the nightlife. And where would they rather shop? Someplace that gives a free ticket or somewhere that doesn’t?

Of course it isn’t pure altruism. Say MSRT buys those tickets in bulk quantities for $5-$10 apiece. The dispensary buys them for $15-$20. It hands them out to anyone who spends $50 or more.

The shopper is happy because free show. The dispensary is happy because it spent $15 to take $50 in sales from competitors. And MSRT shareholders can cheer because at least $5 of that $15 was as close as it gets to pure profit.

Yeah, you read that right. MSRT found a way to turn as little as $5 into as much as $20. Classic entrepreneurial genius. But it’s just one of the ways this tiny start-up is “disrupting” the green industry.

Here's how the MSRT model works in general, whether it's COWA or the directory or the rewards program or a completely new angle. Take the supply chain. Everyone in this industry needs to buy stuff. They have to pay cash for regulatory reasons. Because most of them are very small entrepreneurial businesses, they don't get modern merchant terms. 

MSRT looked into the problem and that's where COWA came from, basically a way to let these scattered merchants pool their buying power and get better pricing. There's close to 10,000 licensed players in this business in the U.S. alone. That's a lot of pool!

Early stages now but the network generated $275,000 in business back in January. As mentioned, terms of the acquisition factor in revenue results as high as $7.5 million in the foreseeable future. This could be big.

After all, MSRT is still a startup itself, barely $12 million market cap as I write this. These numbers can be disruptive. Down at this scale, it's a tidal wave of cash. Even if the network only repeats last year's $1.5 million in revenue, it's a real game changer.

It's how any emerging market category gets credibility and scale: discounts for referrals, incentives for influential reviews, free samples in return for visibility.

MSRT is at the heart of that category. They're the social media network that makes it happen, bridging consumers with the retailers, brands and strain reviews they need to make informed decisions.

Traditional media players still have a hard time with these companies, Forbes says. As a result, just the ad revenue piece here is somewhere between "blue sky" and "green field" opportunity as the industry grows.

It starts with a new idea. Let me show you the Big Three charts in this space and then I’ll show you MSRT. Here’s the usual suspects, all trading alike:

And here’s MSRT. Similar arc in the last few months, but look at the SCALE on the price per share. When this one’s moving right, it’s truly unique. The lines are converging now . . . get ready for the next decisive twist.

The last one unleashed 35% in an uninterrupted burst! This one's just getting started, but WOW:

If you want to invest in the Green World, you can go with your favorite cookie cutter. Or you can throw your hat in with the company that’s helping me-too retailers establish a unique and value-added presence.

Who doesn’t like value? MSRT. It pays consumers rewards. It pays off for retailers. And from that growth curve, it's got the power to pay off for investors as well.

Ticker MSRT

MSRT is listed on the Over The Counter Markets

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Happy, Happy, Happy Trading!