After months of idle and lacklustre performance, the Kanabo (LSE:KNB) share price is finally on the rise. In fact, over the last couple of weeks, the medical cannabis stock is up by nearly 80%! What’s behind this new-found growth? And is it time to adding this company to my portfolio? Let’s take a look.
The rising Kanabo share price
Since the last time I looked at this business, quite a few developments have taken place. As a quick reminder, Kanabo develops and manufactures cannabidiol-based products (like oils) for the health & wellness sector. It combines the sale of these oils with its proprietary inhalation device, VapePod, effectively creating a Gillette-style razor & blade business model. If successful, I think Kanabo’s share price could see some considerable growth.
Last month, the company announced the shipment of its first medicinal cannabis cartridges to the UK. These were produced with the help of its partner PharmaCann Polska. And thanks to the partnership with Astral Health, access to patients in need of such a product has been relatively straightforward.
Moreover, because doctors can prescribe specific doses with the VapePod devices (something not possible with the traditional smoking approach), Kanabo’s product seems to have several advantages for medicinal purposes. But besides revenue finally coming in, this successful product launch also proves that its supply and production pipeline works. So, I’m not surprised to see Kananbo’s share price rising on the news.
More growth comes with more risk
Now that a customer base has been established, the management team wants to act rapidly through strategic acquisitions. Towards the end of July, the company proposed acquiring the European firm, Materia. Besides having a Good Manufacturing Practice (GMP) certification, Materia owns a licensed medical cannabis wholesaler in Germany. By purchasing the business, Kanabo would gain access to an already established network of pharmacies as a new sales channel.
That certainly sounds like a good move. However, acquisitive growth strategies have their risks. Firstly, the management team intends to sell additional Kanabo shares to fund the proposed deal since the lack of profitability makes debt financing unsuitable. That will lead to a potentially significant amount of equity dilution, pushing Kanabo’s share price down.
What’s more, there is no guarantee this deal will be successful. Integrating a company into another often leads to complications that can destroy value rather than create it. With Kanabo’s limited history and experience performing acquisitions, the risk of integration pains seems high, in my opinion.
The bottom line
Since its IPO last February, Kanabo has been slowly turning into what looks like a viable business. The partnerships formed in the past few months have already started to bear fruit. And with certification being received for its products, it seems the company has managed to overcome the initial challenges it faced. That’s encouraging news for Kanabo’s share price.
Having said that, I’m still on the fence as to whether this is a business worth owning. On an operational level, it looks like it’s in a solid position. However, there remains an aura of mystery surrounding its financials. With limited information about its most recent sales volume and price, Kanabo remains difficult to judge, in my mind. Therefore, I’m keeping it on my watchlist for now.
