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Is the rallying Kanabo share price a sign to buy?

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The Kanabo (LSE:KNB) share price exploded by almost 20% yesterday. The medical cannabis company has been on a downward trajectory since its IPO in February this year. So, seeing a sudden surge in price is an encouraging sign. But what’s behind this growth? And is it too late for me to add this business to my portfolio?

The surging Kanabo share price

As a quick refresher, Kanabo is a producer of cannabidiol-based products, such as oils, that can be used in combination with its bespoke inhalation device, VapePod. The firm focuses on the health & wellness sector to provide patients, as well as other consumers, access to medical marijuana.

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Earlier this month, the company shared some exciting news. The first shipment of cartridges had been sent to the UK. And beyond launching its revenue stream, this milestone proved that the firm’s supply chain and production pipeline works. The achievement actually sent the Kanabo share price surging a few weeks ago. But it’s not what’s responsible for yesterday’s explosion.

Despite what the stock price might suggest, Kanabo hasn’t announced any further progress updates with shareholders. So, what happened? It seems investors are getting excited by an announcement from another cannabis company called Materia. Materia is a European-based firm that controls a medical cannabis distribution network of pharmacies throughout Germany. On Wednesday it revealed its latest partnership to distribute a new line of extracts on behalf of Eurox Pharma.

But what does this have to do with Kanabo? Earlier this month Kanabo informed investors it had signed an initial agreement with Materia regarding a potential acquisition of the firm. This means, that the latest partnership between Materia and Eurox could soon become a partnership between Kanabo and Eurox. And according to Materia, “extracts are the fastest-growing format in Germany’s medical cannabis market”. So, I can see why Kanabo’s share price is on the rise.

Taking a step back

The continued expansion of the medical cannabis industry is excellent news for Kanabo and its share price. But does this announcement by another firm warrant a double-digit rise? I’m not convinced.

If Kanabo does acquire Materia, then this deal could be pretty advantageous given the complementary synergies likely to be formed. But apart from the limited information surrounding the size and value of the Eurox Pharma partnership, there is no guarantee that the acquisition will actually go through.

As it stands, things are still in the early days of negotiation. While a term sheet has been signed by both companies, it remains non-binding. This means either party can still simply walk away. And even if a binding agreement is reached, it still requires approval by shareholders and regulators alike.

The Kanabo share price has its risks

The bottom line

To me, the management team’s reposting of Materia’s announcement looks like a not-so-subtle way of trying to sway shareholders to vote in favour of a Materia buyout should a final agreement be reached. And given the recent trajectory of Kanabo’s share price, I’d say investors are pretty keen.

But from a purely operational point of view, not much has changed since the last time I looked at this company. Therefore, despite investor excitement, I’m still sitting on the sidelines for now and keeping Kanabo on my watchlist.

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Zaven Boyrazian 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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