The Kanabo Group (LSE:KNB) share price exploded in its first week of trading last month, increasing from its issue price of 6.5p to a high of just over 40p. That’s more than a 500% rise in a matter of days!
Since then, the Kanabo share price has fallen down to 23p. But is this a buying opportunity for my growth portfolio? Let’s take a look.
What does Kanabo Group do?
Kanabo develops and manufactures CBD-based products and inhalers. The business has been around for a couple of years but has only recently begun selling anything.
It is currently in the middle of a three-month pilot scheme designed to measure several key performance indicators concerning the sale of its products. Specifically testing general demand, supply chain effectiveness, and quality controls.
But this is not the long-term strategy of the business. Using the income generated from selling retail products, Kanabo intends to produce a range of unlicensed medical cannabis oils to be used with its vaporisation devices.
If successful, this could form a viable razor-and-blades business model that could cause the Kanabo share price to rise even higher. But there are plenty of risks to consider.
The risks of investing early
Just like many start-ups, Kanabo has yet to create any proven products or establish a well-known brand. The results from its pilot scheme have revealed some level of customer retention, with around 40% coming back to buy more. While this is undoubtedly a promising start, I believe it needs to be much higher. I’ll be closely watching whether management can boost this metric over time.
This is especially important since the medical cannabis oil products that the company intends to make are going to be unlicensed. Why does that matter? An unlicensed medication doesn’t require extensive clinical trials nor regulatory approval before becoming publically available. This significantly reduces development costs. But consequently, it also means that Kanabo’s oils will never be prescribed by the NHS, as there are already existing licensed products available that fulfil the same role.
Naturally, this creates a significant barrier to entry for Kanabo’s future medical products. And so, the company will have to rely on the reputation of its existing brands to drive sales. Given it has yet to build any substantial reputation, this may be tough.
Can the Kanabo share price climb higher?
The medical cannabis industry is growing rapidly by almost 18% a year. And as more countries legalise medical marijuana, this growth may accelerate. This ultimately creates an excellent environment for Kanabo to thrive in. However, let’s not forget there are plenty of other companies trying to do the same thing.
Personally, it’s too soon for me to add Kanabo to my portfolio, even at its current share price. But I’ll definitely be keeping an eye on it.
Zaven Boyrazian does not own shares in Kanabo Group. 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.