Cannabis, Blockchain – Don’t Forget Drones!

Most investors in small cap companies in the U.S. & Canada had a very good year in 2017, and 2018 is off to a great start.  Despite high volatility, anyone invested in red hot sectors like blockchain or cannabis, have enjoyed tremendous capital appreciation.  Gains in some stocks have been in the thousands of percent.  

However, it’s perhaps prudent to assume that the easy money has been made (in most cases).  Don’t get me wrong, most of my life is spent thinking about high-risk small-cap natural resource stocks, companies exploring for gold, silver, copper, cobalt, lithium, etc.  There’s a place in every investor’s portfolio for highly speculative stocks.

A company that I’ve written about twice before is in a sector that– like blockchain — is poised to change the world in profound ways.  However, this sector, commercial drone delivery, has low correlation to the sectors mentioned above and to the overall market.  Drone Delivery Canada (“DDC“) (TSX-V: FLT / OTCQB: TAKOF) is pioneering a game-changing technology that will enable commercial drones to perform autonomous deliveries of goods & services.  First in remote areas of Canada, then in more populated areas, then in the U.S. and beyond. 

There have already been 3 announcements in 2018.  The most important is that Transport Canada has accepted the Company’s Declaration of Compliance for its X1000 Sparrow cargo delivery drone, meaning that this unmanned aircraft system is now compliant with the Transport Canada UAS standard.  From the Company’s recent press release

“A Compliant UAS is the first of three regulatory components to the Transport Canada Compliant UAS Operator program, and mandatory for a Compliant UAS Operator Special Flight Operations Certificate.  This milestone allows DDC to move forward to becoming a Compliant UAS Operator with the anticipation for the balance of the other two of three approvals in early Q1, 2018DDC has submitted the required documentation and is confident of its approval in the remaining steps.”

NOTE:  {Here’ a great article about DDC’s test delivery market, the Moose Cree First Nation.}

The Company also announced that it is expanding its commercial testing program to the U.S. at the New York Griffiss International Airport unmanned aerial vehicle test site, located in Rome, N.Y.  And, management said this week that it will start testing the Raven X1400 delivery drone, engineered for payloads up to 25 pounds and able to fly ~60 km. 

These drones are designed to meet the challenging weather conditions of Northern Canada where DDC has identified up to 1,000 remote communities where the Raven X1400 and Sparrow X1000 models would meet community requirements in terms of payloads and range. CEO Tony Di Benedetto commented, 

“We continue to develop our platform to expand our capabilities to meet and exceed client requirements,” commented Tony Di Benedetto, CEO. “While doing so, we now simply just look to integrate our FLYTE Management System into a newer airframe design to expand the fleet.”

DDC is attracting a lot of investment attention.  It is actively traded — the Company just moved on to the TSX Venture, and trading volume has soared.  Management confirmed to me what many suspected– institutional funds are getting involved, and it looks like in a big way.  

Over 20 million shares have traded hands in the last 10 trading days.  Buyers paid as much as C$2.20 per share, and millions of shares have traded above C$1.70.  New investors presumably have price targets of C$3.00+.  This is a very important development, individual investors can only take a company so far.  

DDC shares (TSX-V: FLT / OTCQB: TAKOF) are up more than 150% since my last article in mid November, but the Enterprise Value of roughly US$ 185 M remains well below dozens and dozens of blockchain & weed companies.  DDC management expects commercial sales to commence this year, and if all goes according to plan, very strong revenue growth from 2019 on.  

In my opinion, there’s real potential for revenues to be > US$10 million in 2019.  Readers beware, this is just a guess on my part, management has yet to offer guidance.  In looking at valuations in blockchain and marijuana, it’s not hard to imagine a very robust valuation for DDC.  Even US$10 M in sales (growing rapidly) could support an Enterprise Value considerably higher than US$ 185 M.  And, once sales reach into the millions, investors will be looking beyond 2019 in their assessments of DDC’s valuation.

I believe an increasingly likely scenario is that DDC will be acquired within 6-18 months.  A potential takeout at say, C$3.00/share (currently at C$1.75), would cost the buyer about US$ 340 M.  At US$20 M in 2020 sales, that would equate to a 17x Price (market cap)/Sales multiple…. Hardly a stretch given that DDC’s software platform will be especially valuable to select suitors in the retail, logistics, delivery & software sectors.  

If one takes the time to sit back and think about what companies might want to own a leader in the future of commercial drone logistics– the number and variety of potential suitors is staggering.  It’s hard for me to get beyond Fed-ExUPS & DHL when thinking of companies with the most to lose by not being at the forefront of this sea change.  But there’s also trucking companies like; YRC Worldwide & J.B. Hunt Transportation, retailers; Best Buy, Walmart & Staples, drug stores; CVSWalgreen, supermarkets, auto parts, pharmacies, hospital/lab chains, etc.

Take a look at cannabis valuations, a less world-beating industry than commercial drones.  The chart on the right shows the 10 largest companies and their trailing 12 months Price/Sales ratios.  The average is 216x!  Assuming that the average multiple is cut in half in 2018 and halved again in 2019, that’s still 54x forward Price/Sales.  If DDC were to trade at 54x 2019 revenues, its current market cap implies sales of just US$ 4 M next year.  Again, not an aggressive valuation for a paradigm-shifting technology company.

Compare publicly-traded DDC with the dozens of global “unicorns” (start-up companies with private valuations > $1 billion).  Many, (such as Uber), have giant sales figures but are losing hundreds of millions a year!  By contrast, DDC expects to be cash flow positive fairly quickly, as it won’t need to redeploy a large percentage of sales into R&D and working capital.  For instance, DDC is outsourcing drone procurement (not building its own drones).

Conclusion

There are dozens & dozens of cannabis and blockchain stocks trading at very lofty valuations, some with no revenues, some with Price/Sales ratios in the hundreds.  Many are overvalued, but will grow into their market caps such that the Price/Sales ratios for 2019-20 will be a lot lower.  Even still, a prospective 17x Price/Sales ratio for Drone Delivery Canada (TSX-V: FLT / OTCQB: TAKOF) is by no means a stretch in my opinion.  

The Company is on the cutting-edge of a paradigm shift, a must have technology for a number of industries.  Once companies start delivering products by drone, all companies will want that capability.  The ones who gain access to drone delivery services will thrive, those who don’t could fail.  

It all starts with DDC’s network platform, an air traffic control for commercial drones– a railway in the sky.  There’s no commercial delivery drone industry without companies like DDC.  

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER](together, [ER]) about Drone Delivery Canadaincluding but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Drone Delivery Canada are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this interview was posted, Peter Epstein owned shares and/or stock options in Drone Delivery Canada and the Company was an advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.