Investors can now consider renewable products company Amyris (NASDAQ:AMRS) as a “marijuana stock.” The Emeryville, California-based firm signed a deal to license cannabinoid products. This sent AMRS stock surging much higher in Tuesday trading.
Now, investors must decide if and how to trade Amyris stock. Given the renewed popularity of marijuana stocks, the stock will likely remain a momentum stock for the foreseeable future.
New Deal Changes the Perception of AMRS Stock
AMRS stock rose by more than 73% on Tuesday upon announcing its entrance in the cannabinoid market. The company did not reveal the name of its partner in this agreement; however, we know the value of the deal will come to $255 million. Some of this could come in the form of royalty payments as Amyris works to bring sustainably sourced CBD to the beverage and skin care markets. The final agreement should happen by the end of March. Products from this deal should appear on shelves 18 to 24 months after final approval.
Before this agreement, Amyris survived as a little-known industrial biotech company that launched its IPO in 2010. Since peaking in 2011, the stock has lost about 99% of its value. Now, thanks to cannabis, it could be on its way to a long-awaited comeback.
The Deal Will Bolster Robust Revenue Growth
While the association with weed will likely boost AMRS stock, its financials have shown improvement for some time. In the middle of the decade, stagnant revenue and massive losses seem to define AMRS.
However, the company more than doubled revenues in 2016 and again in 2017. Although this growth has slowed, analysts had predicted revenue increases would remain well into the double digits before this announcement. Losses have also narrowed in recent years. With cannabis-related sales coming in, both revenue and earnings should improve dramatically.
Also, even after its massive upward surge, AMRS trades at just over two times sales. This compares well to cannabis industry giants such as Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY), both of which maintain triple-digit price-to-sales ratios.
Furthermore, Canopy’s market cap of nearly $16 billion is more than 40 times the size of Amyris’s $390 million market cap. Yet with 2018 revenues of only C$255 million ($193.4 million), Canopy will only bring in about 20% more in revenue than the $161.8 million analysts expect from Amyris. While I do not think AMRS will catch up to Canopy’s market cap, I think this deal will help close much of that gap.
AMRS Could Benefit From an American Cannabis Boom
Moreover, marijuana stock investors remember the Canadian cannabis boom that cooled off following full legalization. Now, with hemp achieving legal status in the U.S., a comparable American cannabis boom looks to have just begun. Canopy, who will begin producing hemp in New York, again trades at levels not seen since legal status became official in Canada.
If such a boom has in fact started in the U.S., this should bode well for AMRS stock regardless of fundamentals. Given the 73% surge in one day, the stock will more likely pull back for now. However, over time, the boom in cannabis stocks should take it higher. This separation from fundamentals will turn off some buyers. However, for those comfortable trading mostly on momentum, I see the potential for profit in Amyris stock.
Final Thoughts on Amyris Stock
The move into the cannabis sector will boost Amyris stock in the near term regardless of earnings. Amyris has spent years as a little-known biotech company whose stock had gained little traction in recent years. However, a move into the marijuana sector sent AMRS more than 70% higher in just one day.
This occurs as a U.S. cannabis boom has likely ignited thanks to hemp’s new legal status. Despite losses, AMRS stock looks cheap in comparison to marijuana giants such as Canopy Growth. If nothing else, the momentum should take the company’s price-to-sales ratio much higher.
Like other marijuana stocks, AMRS should grow well beyond its fundamentals. This will mean any movement or purchase decisions will drive on momentum shifts. This goes beyond the comfort level of some investors. However, for those willing to take that risk, AMRS appears poised to bring higher returns to those with a high tolerance for risk.
As of this writing, Will Healy did not hold a position in any of the aforementioned securities. You can follow Will on Twitter