Introduction
Cannabis stocks aren’t exactly where investors have been rushing to put their money lately. If anything, the sector still carries a lot of baggage from the hype, terrible capital allocation and shareholder dilution that followed Canadian legalization. That’s partly why High Tide (HITI.V) caught my attention. When I started digging into the company, I expected another speculative cannabis story built around what might happen someday. Instead, I found an operating business generating hundreds of millions of dollars in revenue, producing positive free cash flow and steadily taking market share.
High Tide shares closed August 7 at $3.19, giving the company a market capitalization of roughly $280 million. The stock has also been frustratingly stagnant: despite being slightly positive over the past year, it remains well below its 52-week high of $5.59. My opinion after looking through the business? High Tide is one of the more interesting speculative Canadian small-cap stocks I’ve researched recently. I’m not ready to call it a slam-dunk investment, but the underlying business looks considerably stronger than the share price might suggest.
What This Company Actually Does
High Tide is essentially a cannabis retailer with an increasingly international business attached to it. Its most important asset is Canna Cabana, Canada’s largest cannabis retail chain. The company operates more than 220 locations across British Columbia, Alberta, Saskatchewan, Manitoba and Ontario and has captured roughly 12% of the cannabis retail market across those provinces. (High Tide Inc.) What makes Canna Cabana somewhat different is its discount-club strategy.
Think Costco-style thinking applied to cannabis retail. Customers can join the free Cabana Club or pay for the company’s ELITE membership, receiving additional discounts and benefits. By the end of Q2, Cabana Club membership had surpassed 2.65 million, while paid ELITE membership exceeded 178,000. (High Tide Inc.) High Tide has also moved beyond Canadian recreational retail. Its acquisition of Germany’s Remexian Pharma gave it exposure to Europe’s growing medical cannabis market. That diversification is something I’ll be watching closely.
Why I’m Interested
The thing that originally attracted me wasn’t cannabis. It was the disconnect between the stock and the business. At $3.19, investors aren’t exactly pricing High Tide like a rapidly expanding growth company. Yet its latest quarter produced record revenue of $179.3 million, up 30% year over year. That was the company’s fourth consecutive quarterly revenue record. (High Tide Inc.) That’s worth investigating.
I also like finding companies where the narrative surrounding the sector is worse than what’s actually happening inside the business. Cannabis remains deeply unpopular with many investors, and deservedly so in some cases. But an unpopular industry doesn’t automatically mean every company operating within it is a bad business.
What I Like
The biggest positive for me is that High Tide’s growth is becoming more credible. Revenue growth alone doesn’t impress me much if a company has to continually issue shares or burn enormous amounts of cash to produce it. Eventually shareholders need to see something for that growth. High Tide is beginning to show that.
Second-quarter adjusted EBITDA reached a record $13.9 million, up 73% year over year. Gross profit increased 36% to $48.4 million, while gross margin improved to 27% from 26% a year earlier. Operating income reached a record $6.1 million. (High Tide Inc.) Those numbers tell me something important: revenue isn’t simply getting bigger. The economics underneath it appear to be improving as well. The company also produced positive adjusted net income and generated another $1.5 million of free cash flow during Q2. Over the previous four quarters, free cash flow totalled $13.4 million. (High Tide Inc.)
That’s probably the number I care about most. High Tide is starting to look less like a speculative cannabis venture and more like an actual retailer capable of funding at least part of its own expansion. Then there’s the membership model. More than 2.65 million Cabana Club members gives High Tide something many cannabis retailers don’t have: a large direct relationship with its customers. If those members remain loyal, High Tide can use its scale to drive traffic, negotiate purchasing economics and introduce higher-margin products.
The company’s private-label strategy could eventually become particularly interesting. High Tide had expanded its white-label portfolio to 41 SKUs by the end of Q2, although these products represented only about 1.7% of bricks-and-mortar cannabis sales. (High Tide Inc.) That’s tiny today, but it gives management another lever for improving margins.
The Numbers
This is where High Tide gets interesting. We have a company with roughly a $280 million market cap generating quarterly revenue approaching $180 million. Meanwhile, the latest reported quarter produced $13.9 million in adjusted EBITDA. I’m not suggesting investors should simply compare market capitalization to revenue and declare the stock cheap. Retail businesses can generate enormous revenue on thin margins. That’s exactly why margin expansion matters so much here.
High Tide’s consolidated gross margin reaching 27% and adjusted EBITDA growing substantially faster than revenue are encouraging signs. (High Tide Inc.) The balance sheet isn’t spotless either. Management said in June that total debt stood at approximately $63.6 million, while cash and restricted cash at quarter-end was $36.5 million. High Tide has also secured approval for $40 million of senior secured credit facilities from BMO. (High Tide Inc.) I’m comfortable with some leverage when it’s funding productive expansion. What I don’t want to see is debt and dilution becoming necessary just to keep the business functioning. There’s a big difference.
What Gives Me Pause
My biggest concern is still the industry itself. Canadian cannabis retail is extremely competitive. High Tide’s discount strategy helps it attract customers, but competing heavily on price can make maintaining healthy margins difficult. There is also regulatory risk. Cannabis is an unusually regulated industry, and High Tide’s expansion into Germany adds another jurisdiction where government policy can materially change the economics. Then there’s dilution.
This matters especially with small-cap companies. Growth doesn’t mean much to me if the pie gets bigger while management continually hands out additional slices. High Tide has historically used equity as part of its growth strategy, so share-count discipline is something I’d monitor carefully. Finally, I don’t want to assume Germany automatically becomes the next growth engine. Remexian produced $31.6 million of revenue in Q2, with gross margins reaching 27%, which is encouraging. But it’s still relatively early. (High Tide Inc.) I’d like several more quarters before assigning significant value to the international expansion.
Valuation
At $3.19, I think High Tide is intriguing. Not necessarily cheap enough that I’d ignore the risks, but inexpensive enough that I want to keep digging. The market appears skeptical that today’s growth and improving profitability will translate into meaningful per-share value over the long run. Given the history of cannabis stocks, I understand that skepticism.
Personally, I wouldn’t chase HITI because of cannabis-sector hype or analyst price targets. I’d want to see continued positive free cash flow, further margin improvement and evidence that international expansion can generate attractive returns without excessive dilution. If those pieces continue falling into place while the valuation remains around today’s level, my interest would increase considerably.
Who Should Own This?
I see High Tide primarily as a speculative small-cap growth investment. It’s not a dividend stock. It’s not something I’d put in the same category as a Royal Bank, Canadian National Railway or Fortis. An investor considering HITI should probably be comfortable with volatility, cannabis-sector risk and the possibility that the market remains uninterested even if operating results improve. For conservative investors looking for predictable income, I’d look elsewhere. For someone willing to accept more risk in exchange for potentially significant upside from a growing small-cap company? High Tide becomes much more interesting.
My Final Thoughts
I came away more impressed with High Tide than I expected. The company has built Canada’s largest cannabis retail network, accumulated millions of loyalty members, expanded internationally, reached positive free cash flow and is showing signs of operating leverage. At the same time, the stock continues trading at a valuation that suggests investors remain deeply skeptical.
Maybe that skepticism is justified. But this is exactly the type of situation I like researching. If I had to describe High Tide in one sentence: it’s a speculative cannabis stock that’s beginning to look much more like a real growth business than a cannabis speculation. At $3.19, I’m not ignoring the risks. I’m also not ignoring the progress.
