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Is the Kanabo share price a bargain not to be missed?

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Cannabis leaves of a plant on a dark background
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Since a very strong IPO, where the Kanabo (LSE: KNB) share price rose from 6.5p to over 40p in 48 hours, it has since struggled. Indeed, it closed Wednesday around 20p, higher than the IPO price, but well down on its all-time high. The fall has mainly been caused by diminishing optimism, rather than any bad news. As such, is the Kanabo share price a bargain not to be missed for me, or are the risks too great? Let’s take a look.

The Kanabo business model

Kanabo is in the medicinal cannabis industry, and currently sells a range of cannabidiol (CBD) products in the UK and Germany. Further, it is also undertaking a pilot scheme to measure key performance indicators, such as consumer preferences and the effectiveness of the supply chain. The long-term plan is to establish a range of products, through research and development, and deliver growth through the sale of these products.

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Nonetheless, the company is in its early stages, and is only just starting to generate revenues. This means that it is loss-making, and the Kanabo share price is highly speculative. While this is not a bad thing, it is still a risk to consider.

Industry news

It is clear that Kanabo is in a growing industry. Indeed, Europe’s cannabis market is projected to grow to over $3.1bn by 2025, with a compound annual growth rate (CAGR) of 52%. Britain is expected to have the greatest cannabis market growth, with a CAGR of 98%. This bodes extremely well for Kanabo, because one of its primary markets is the UK. As such, the Kanabo share price could rise in response to growth within the whole industry.

Kanabo also seems well-placed to capitalise on this growing market, especially after a recent share placing that raised £1m. This money can be used to help support the company’s operations, establish its brand and increase revenues.

Is the Kanabo share price a bargain?

Due to it being unprofitable, it is difficult to come up with a fair valuation for Kanabo stock. Instead, it seems that the Kanabo share price is currently based on optimism that the company will perform strongly in the future. On this basis, I would not state that the Kanabo share price is a bargain, yet it is clear that there is significant upside potential.

Even so, I’m currently only keeping an eye on the stock rather than buying. This is due to three main risks. Firstly, the company has already incurred large losses due to the costs of research and development. Such losses also look set to continue over the next few years. Secondly, while the cannabis industry is growing, there is the risk that laws can change. This could have a materially adverse effect on Kanabo. Finally, competition is likely to increase further. As a small start-up, Kanabo may struggle to compete against larger American cannabis companies or pharmaceutical firms. These are all risks that I think must be considered with regarding the Kanabo share price, and they’re the reasons why I’m currently watching this stock from the sidelines.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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