It appears that recreational cannabis use is well on the way to gaining acceptance in North America, and recent studies in both Canada and the United States have documented that a majority of the citizens of both countries are in favor of legalization.
There is a historic comparison to this gradual shift in public opinion and the evolution towards institutional acceptance as a legitimate product. Many years ago the casino gaming industry went through a similar process as it was gradually approved and legalized in several states and provinces, and came to be seen as a mainstream form of entertainment that is widely available, albeit regulated and taxed nonetheless.
Prior to that, it was the repeal of Prohibition that enabled brewers and distillers to emerge as profitable and legitimate investment options.
So there is a precedent to this trend that began in 2012, when voters in Colorado and Washington approved motions to make recreational marijuana legal for adult use. In July of this year, Nevada became the fifth state to do so. The current government in Canada has pledged to legalize cannabis nationwide.
The potential expansion for the market remains attractive as each additional jurisdiction allows legal recreational users to participate. Some analysts have estimated this market will eventually grow to more than ten times its current size. This is attractive for investors looking to participate in the trend but it also creates challenges for legal distributors in the sector. Dispensaries must develop new sales channels, and the regulatory framework imposes strict reporting requirements that must be complied with.
With this reality in mind, an emerging micro-cap stock appears to be well positioned for this transformation. MassRoots, Inc. (OTCQB: MSRT) is a technology innovator that has established a beachhead within the community of cannabis users through a popular social media app. However the company is now focusing on the strategy to capture revenue growth as a service provider for data management geared to cannabis dispensaries.
This new business model became a reality with the recent acquisition of the software firm Odava, Inc. The deal provides the capacity to track point-of-sale data, and generate reports for regulatory compliance on behalf of dispensaries. The technology automates and streamlines the business of providing legal cannabis sales to end users, while offering benefits related to inventory management.
MassRoots has also built partnerships with other technology firms that specialize in the cannabis sector, including New Frontier Data, and Grownetics. This alliance has enabled the company to create the most advanced analytical platform in the sector.
The combination enables cannabis dispensaries to collect data necessary for regulatory reporting, and for building their distribution channels, while allowing end-users a means to source the highest rated cannabis strains and make educated purchasing decisions based on peer product reviews.
For an emerging company in a rapidly growing sector, MassRoots appears to be gaining critical mass on the drive to become profitable. The company achieved positive cash flow in Q1 of this year, generating revenues of $1.8 million. This, along with cash raised from the exercise of outstanding warrants, has enabled MassRoots to pay off its long term debt and clean up its balance sheet.
The legacy social media business is well established. The company recently surpassed the milestone of one million registered users for its online app. This builds greater clout with advertisers that will support the pricing power for future sales growth. It will also generate a stronger conduit for MassRoots to deliver sales support for its client base of licensed dispensaries.
The next phase of growth for MassRoots will come from attracting new dispensaries to its software platform. Consider that in California alone, an estimated 1,000 dispensaries are expected to be in operation. Management has expressed its ambition to increase its client base from dozens, to hundreds of dispensaries by next year. Along with the growth of the overall market as more jurisdictions legalize cannabis use, the company will leverage its strength with its social media presence to attract new users to its industry leading software technology.
If MassRoots is able to deliver on its ambitions as a service provider, while continuing to build advertising revenues from its social media unit, the potential for a rapid improvement in overall financial performance may be within reach. I believe there is tremendous appeal for the cannabis sector given the trend for legalization and the most important element now is to establish operating fundamentals that can attract serious investment. The company is now on the cusp to demonstrating it can do so.
This is a company with few peers for comparison, due to its unique combination of business units. MassRoots has added an attractive revenue generating platform to provide essential services for data management that is perfectly timed to catch the majority of the pending growth curve for the entire market. There is also a powerful catalyst for share price appreciation if MassRoots gains a listing to begin trading on the Nasdaq Exchange.
Meanwhile the social media presence with an established online community should also contribute growth through advertising revenues. The premium valuation for social media companies is also worth considering. For example, Yelp Inc. (NYSE: YELP) runs an online platform for peer reviews and carries a market cap above $2.5 billion. MassRoots is currently valued in the $50 million range.
As a speculative microcap stock, there is a lot to like about MassRoots, Inc. The clean balance sheet provides a measure of safety to go with the high growth rate. The investment in marketing to build a significant community of end users, along with establishing partnerships and alliances with other leading companies within the sector, should now pay off as MassRoots rolls out its software platform and attracts a larger client base.
Ultimately, it is this potential for increasing revenue and the expectation of profits that will be the driver for a higher share price in the quarters ahead. MassRoots is positioned to deliver a growth rate that should command a much higher market cap in this vibrant sector.