The Most Exciting Marijuana IPO in 2019 Would Be...

The cannabis industry has had a fantastic year, even if that's not being reflected in the share price of most marijuana stocks of late.

In October, our neighbor to the north became the first industrialized country in the world to give the green light to recreational marijuana. In a few years, when the industry has had time to expand its capacity and lay the foundation for additional sales channels, it could easily be bringing in $5 billion or more per year. And if these revenue estimates prove accurate, at least some pot stocks will walk away with a boatload of profit.

This would, arguably, be the most exciting IPO of 2019

But with 2018 and its numerous history-making moments almost in the books, attention now turns to what 2019 might bring for the cannabis industry. Most industry pundits are looking for a continued emphasis on consolidation, a growing focus on expense management (since earnings reports actually matter now), and a push into alternative cannabis products. The latter is especially worthwhile, with the Canadian Parliament expected to review and approve additional consumption options (e.g., edibles, vapes, concentrates, and cannabis-infused beverages) in the upcoming summer.

As for me, I'll be keeping my eye out for what would arguably be the most exciting initial public offering (IPO) of the year, assuming the company wants to go public.

While "most exciting" is a purely arbitrary phrase, I'm intrigued by the thought of San Francisco, California-based Eaze going public.

The "Uber of weed"

Eaze, as the company's motto describes, is "marijuana delivered." It's a delivery service for cannabis that was launched in 2014 and initially intended to bring medical weed to people's doors. Presumably, not all medical marijuana users are going to be able to make it to a pot dispensary, be that for poor health reasons or lack of transportation. Eaze aimed to solve that problem.

However, Eaze's prospects have shifted dramatically since 2016, when California residents voted to legalize recreational weed via Prop 64. What had been a market that angled for more than $1 billion in yearly sales is now a state that could potentially eclipse $7 billion in annual sales by sometime early next decade. The addition of adult-use weed customers greatly magnifies Eaze's pool of users.

The way it works is that consumers use the Eaze mobile app on their smartphone to place their product orders. Eaze itself does not own cannabis grow facilities, meaning it acts more as a high-margin middleman. Once the order is placed, Eaze works to find the closest dispensary to the consumer and ensures that the product is delivered quickly, usually within about 20 minutes' time. In fact, because of its role in facilitating the delivery of cannabis in much the same way Uber Eats has facilitated the delivery of ordered food, the company has earned the nickname of the "Uber of weed."

Here's what makes Eaze really exciting

However, it's not just the aspect of the delivery service that's exciting. It's the ability to expand that service to new markets and to utilize the technology behind the service that's so appealing.

Recently, Eaze announced its intent to launch "Eaze Wellness," an online marketplace where consumers can order hemp-based cannabidiol (CBD) products. Cannabidiol is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Sales of CBD products are expected to explode from $591 million in 2018 to $22 billion by 2022, according to cannabis analytics firm Brightfield Group.

While this online marketplace won't be available in California or eight other states, it is available to consumers in 41 total states, and Washington, D.C. Said CEO Jim Patterson:

The other aspect of the company that's really intriguing is what it's doing behind the scenes with its technology.

The U.S. marijuana industry is primarily reliant on cash, because financial institutions don't want to risk the possibility of monetary and/or criminal penalties associated with aiding a cannabis business. Even though the federal government has maintained a hands-off approach to regulating pot at the state level for a while now, it's still an illegal substance on Capitol Hill, after all. This is where the Eaze app becomes so valuable. Since marijuana businesses struggle to analyze data that's conducted in cash, the Eaze app, where sales are made through debit or credit cards, allows for a wealth of data to be gathered. This data can be used by dispensaries to better reach their customer, and can aid dispensaries by ensuring that popular products are reordered and kept in stock. And the more in-the-know dispensaries are, the more prepared they'll be to deliver those products when users place their orders through Eaze.

Are there risks? You bet

Of course, just because I'm personally excited about the prospect of Eaze going public at some point in the future, I'm not oblivious to the risks, either.

For starters, there are safety concerns with the company's core delivery service in California. Transporting marijuana via messenger is a risk that can't be discounted.

Secondly, identity verification can be a challenge. Although Eaze uses a secure website to allow users to upload their identification, ensuring that the delivery winds up in the hands of an adult could prove tedious and costly.

Third, while I fully support Eaze's expansion plans, they aren't going to be cheap. Laying the groundwork to deliver cannabis online, and building up its core California delivery service, is going to cost quite a bit of money. This almost ensures that the company will forgo profitability in favor of revenue expansion for the next couple of years. Mind you, as a private company we investors don't have access to the company's financial statements, but my suspicion is that operating losses would be expected.

And lastly, investors are probably going to be excited about this unique business model (I know I am), and that probably means an inflated market cap right out of the gate. We've witnessed a number of instances where pot stocks sported huge market caps following their IPO, only to give back a substantial portion of their valuation shortly thereafter. That could be the case with Eaze, as we're talking about a company that'll take a few years to really see the fruits of its expansion.

It remains to be seen if Eaze makes the move to the public arena in 2019, but with readily available capital should it go public, the carrot is certainly being dangled.

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