There are many different ways to profit from the burgeoning cannabis industry, ranging from GrowBLOX Sciences Inc.’s (OTCQB: GLBX) growing solutions to Medbox Inc.’s (OTCQB: MDBX) dispensing technologies to Cannabis Science Inc.’s (OTCQB: CBIS) focus on the medicinal properties of the plant, but cannabis testing could be the most compelling.
Cannabis testing is expected to generate close to a billion dollars in revenue by 2020, according to a new report by GreenWave Advisors, a comprehensive independent research firm focused on the emerging legal cannabis industry.
“It’s an exciting time to be in lab testing, because it’s one of the subsectors within the cannabis industry that we believe is sustainable as laws change,” said GreenWave Advisors Founder Matthew Karnes. “We view this as the most attractive subsector of the industry.”
Mr. Karnes points to a number of factors that make lab testing such an attractive subset of the emerging industry. While there’s a large initial investment required to establish a lab, which effectively creates a barrier to entry for competitors, existing labs operate with gross margins of between 60% and 65% with predictable recurring revenue driving strong free cash flow. The expansion of services beyond testing – into things like data analytics and consulting – could push these margins closer to the software industry’s 90%+ gross margins.
Ample Room For Growth
“We expect a little north of five million pounds of marijuana to be tested by 2020, which transcends into about $565 million [in lab testing revenue],” said Mr. Karnes. “And then, if you gross that up for other services – the data analytics and consulting – you get north of $850 million. But, it’s likely that our estimates are conservative, because testing will become less significant as a part of the total revenue mix as time goes on.”
GreenWave Advisors sees the market as very bifurcated at the moment, with regulations varying between states and no consistent national framework; however, the firm believes these dynamics will change as the industry matures. Mr. Karnes projects that large existing cannabis labs will be the biggest winners in the space, as they reach economies of scale, while smaller labs will be forced to consolidate or go out of business.
DigiPath (OTCQB: DIGP) Labs Actively Testing Product
The initial DigiPath lab is located in Southern Nevada and targets the booming City of Las Vegas, which is expected to benefit handsomely from the recent legalization of medical marijuana. With a program that supports reciprocity, out-of-state medical marijuana users will be able to access medicine during their trip to Las Vegas, and with over 40 million visitors a year to Las Vegas, sales are expected to be brisk.
“We opened our flagship lab about 35 days ago and we’re one of only two labs open in Southern Nevada,” said DigiPath Inc. CEO Todd Denkin. “Our plan is to duplicate this lab in all states where marijuana has been legalized.”
“The Department of Health has predicted that 540,000 pounds of marijuana will need to be grown to meet demand in the State of Nevada,” said Mr. Denkin. “Right now, we are going to focus in on the Las Vegas market and figure out how the market moves to see if we need to open something in Northern Nevada.”
While Las Vegas represents a compelling near-term opportunity, the company’s long-term goal is to expand into all states where marijuana has been legalized in order to become a predominant leader in the cannabis testing space.
“We are exploring different opportunities in various states right now,” says Denkin. “We are looking for maybe some struggling labs or maybe some up and coming labs as well. Our plan is to either buy or acquire or just go ahead and apply ourselves in these states.”
Cannabis investors may want to take a look at DigiPath as a leading player in the rapidly growing cannabis testing industry.
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