$LFLY aka Leafly is supposedly an online 'marketplace' where one can go learn and place orders for marijuana. When the company went public, it went public on an Enterprise Value of $388M with 2021 revenue of $43M and obviously negative earnings, like most 'growth' stocks. It's main competitors in the market right now are Dutchie and Weedmaps, with Weedmaps offering the most similar service to Leafly. Leafly itself has this comparison chart vs competitors, but in my opinion this chart is very misleading at best. The other competitors listed don't matter except for maybe iHeartJane, but I'll get to that later since iHeartJane and Leafly are actually jointly working together.
Weed Industry
Anyone who follows weed stocks know that it has been battered down in the past year after reaching highs around Feb of 2021. The most well known ETF is $MSOS, which you can use as a tracker for how weed stocks are performing. With that said, because weed is still illegal federally, most weed stocks are not listed on the major exchanges. Those that are not 'weed touching' aka offer ancillary products and services, like $LFLY and $MAPS and $AGFY are however allowed to be listed on exchanges like NASDAQ. Some believe that if weed is legalized, there will be a pop in prices just from the uplisting of tickers as more people can now buy the stock itself. $LFLY won't get the benefit of this uplisting, just the overall benefit of weed legalization.
Now weed legalization itself is a headache on a federal level. I won't get into who's right and who's wrong, but the odds of it happening are VERY slim, unless the Democrats are so desperate during midterms that they'll cave in. From a high level, this is what's going on. The House has been willing to pass the SAFE Banking Act, and I believe numerous times. The SAFE Banking Act basically eliminates regulatory risk of banks dealing directly with weed companies (that's why today when you buy weed, it's still 'Cash Only'). This would help out the industry quite a bit, and you can imagine how helpful it would be for online ordering.
The hold up is in the Senate. The Republicans seem to be okay with passing the SAFE Banking Act and as of today, want to posture themselves as somewhat pro-weed, even though historically it's been the Democrats that have been pushing weed legalization. That's why you have representatives like Nancy Mace trying to introduce weed legalization acts. In other words, Reps are trying to position themselves to get some credit for legalizing weed. The Democrats don't want to legalize weed, because 1) They don't want Republicans to take credit and 2) They want to also pass a bunch of social equity / social justice measures alongside the legalization of marijuana. The Reps obviously don't agree with the social equity measures (such as letting every charged weed dealer go free), and so, in a nutshell, weed legalization probably won't occur any time soon due to politics and maybe not even in our lifetime. All 50 states could have legalized weed and on a Federal level, it still may not be legalized due to 'politics'.
With that said, yes, if weed was legalized tomorrow, it would boost all Weed stocks INCLUDING $LFLY. The TAM of weed is huge and so from an industry standpoint, there are many tailwinds that could help out the stocks. As for when those tailwinds will actually occur – that's highly speculative.
What Does Leafly Do
As I mentioned before, Leafly views itself as an online marketplace for weed. Basically stores pay Leafly money to be listed on their website, and the hope is Leafly drives customers to buy weed from the store. The more customers that visit the website, the more important it is for a store to be listed on the website. Even though that's it's current business, Leafly's mission statement is in contrast from that. Leafly's mission statement is to 'help people discover cannabis', and it's goal is to be a repository of weed strains and the top place for one to educate yourself on weed.
Now that sounds great on paper, to be basically the Wiki of weed, but when you take a step back, how does that even make money? There are millions of blogs out there on every single product, yet, how many of those are million or billion dollar companies. Wiki itself survives on donations, not from monetization. Don't get me wrong. Leafly is probably the best source on the internet to learn about weed strains and Leafly itself publishes frequent industry reports that are widely cited. They are a trusted brand, but how does all that equate to $$$? If you need a business consultant, you go to McKinsey and Co, not Leafly. If you want to learn about weed, well you could always just Google.
You can see that monetization is an issue already. If you look at Google Search Trends, Leafly and Weedmaps are basically neck and neck, yet Leafly only managed to make ~40M last year while Weedmaps makes ~50M a QUARTER. Similarweb also paints a similar story. Traffic is neck and neck and in some cases Leafly comes out ahead. Yet, where's the money? Leafly seems to be more interested in creating fancy blogs than actually trying to build a business that offers returns for investors. Leafly's ONLY competitive advantage is the content on its website and that's it – and it even admits to this. If weed were to be legalized, it's entirely possible for many other advertising channels to open up (Google and Facebook for example) that may provide even better ROI for companies. With that said, there'd still be a lot of regulatory stuff these new entrants would have to work through, and additionally, it's not like Facebook and Google really advertise tobacco and alcohol. But the risk is there in which a dispensary finds that it makes more sense to advertise elsewhere, decreasing margins for Leafly.
Now that we understand that the 'moat' for Leafly is basically it's glorified Pokedex, let's review that competitive landscape slide again.
- Consumer Marketplace: I agree with their assessment. Leafly and Maps are currently at the tops when it comes to the weed marketplace scene. With that said, upon legalization, you could imagine, Grubhub, Doordash, Uber Eats, Google, Amazon, etc.. all potentially joining the market.
- Size Of Audience: I also agree with their assessment. Leafly does command the most traffic out of it's competitors right now. But once again, upon legalization, Google, Instagram, Yelp, etc.. may exceed Leafly traffic and be better advertising channels.
- Consumer Matching Technology:
- Content and Educational Library: Agree here, this is their moat. This is probably the only thing that will still hold true after legalization
- Reviews: Agree here, but Google and Yelp and many other places have 'reviews too.
- Market Penetration: This is misleading but yes, out of the other companies listed on the slide, this is true. But once again, Google, Uber Eats, Grubhub, etc.. are all waiting on the sideline.
- Ecomm-Enablement: This I HIGHLY disagree with, and will expand upon next. I'd put Leafly at 1/4 the pie if anything, not 3/4 like they suggest.
- Monetization: HA – this is the company that basically makes the least money out of Weedmaps and Dutchie. This one is pure false. We've already talked about monetization issues.
- Data Insights: I'm very surprised that Leafly thinks it's own data is worse than Weedmaps. Since this is an investor presentation, the reality may be even worse. This basically takes away some credibility as being the 'source of info' for weed.
Ecomm-Enablement – The Big Red Flag (outside of inability to monetize)
So about this stuff. Ecomm Enablement is basically the ability for stores to sell their product online and through Leafly's website. Yoko Miyashita, the CEO of Leafly, already is throwing shade at this concept. Here's what she said:
We view the competitive landscape as a funnel – at the top: there are consumer marketplaces and customer acquisition channels; at the middle, online ordering enablement; at the bottom, back-end tech and feature/service providers, like POS and loyalty services. Moving Left to right on the slide – At the top, there are 2 leading consumer marketplaces but ours is differentiated by our content, that allows us to build demand in a market before legalization, and match consumers to the right products. Our strains database and user generated content can’t be created quickly. It has to be purchased or built over time. And that, in and of itself, is a moat for our business. We are geographically dispersed and focused at the top of the funnel, because we believe remaining asset-light focused at the top of the funnel allows us to scale at a lower cost and higher velocity across more markets. Going across the chart and deeper down the funnel. There are order enablement providers, but we have embed menus, too and offer a powerful top of funnel demand generation engine, that isn’t part of competitor offerings.
Leafly keeps on 'thinking' it's an online marketplace for weed, when in actuality, it's a glorified pokedex. The reason why Leafly is not a viable online marketplace, is because it places ZERO emphasis on the market place infrastructure itself (which it itself thinks is at the bottom of the totem pole in terms of importance). In order to have a viable market place, businesses, need to be able to list their products in a seamless manner on the market place and customers need to be able to seamlessly buy said products. If there are hiccups in this process, it drives customers away and businesses lose money. There are may ways this process can breakdown. For example, products that are supposedly available but then not available upon checkout. Or, customers receiving the wrong product etc… each of these could reduce the conversion rate of customers and reduce the number of repeat customers.
Everyone understands that to increase the conversion rate for customers, you won't their shopping experience to be as easy and smooth as possible, yet Leafly doesn't understand this AT ALL, given that it wants to remain a Pokedex – as given by the CEO's own statements.
Yet Leafly's competitors understand this. This is where my discussion of iHeartJane comes in. You can see on the completive chart that Dutchie and iHeartJane are ranked the highest when it comes to Ecomm-Enablement and that is true. Both Dutchie and iHeartJane offer POS systems (which is the system that allows you to accept payments from customers and keep track of sales and inventory). In fact, POSs are so important that Dutchie went out and acquired the two top POS systems in Greenbits and Leaflogix in March of last year. Weedmaps, instead of buying POSs has its own internal developed POS system that integrates with its marketplace.
What does Leafly have? As far as I know, Leafly has nothing, it's an online pokedex. Well actually, Leafly got so scared at this industry development that it did the only thing it could with it's limited funds and that was to partner with iHeartJane, which also is a top POS system. But partnership is NOT ownership.
Why is ownership important? Well like I said, seamless integration with the online marketplace is important. The problems I mentioned before DO happen in the weed industry. That is, what a customer sees as 'available' online may not be the actual inventory a store has. A store may have just sold it's last pre-roll to a walk-in customer, yet another customer ordering online may still be able to buy it, only to later find out that it's sold out already. That provides a VERY POOR experience to the customer. As far as I know, Leafly does not have it's own in house POS system, and in fact, the CEO herself throws shade at this concept. She touts the pokedex being asset light, which is true, and the other 'stuff' as beneath Leafly. But you know what else is asset light? SaaS, which is what a POS is.
Not only that, when it comes to SaaS, that's recurring revenue that businesses love. SaaS also means that it has it's own ecosystem and everyone knows, once you are on an ecosystem, even if you hate it, it's a pain to switch ecosystems. Leafly has no sticking power with businesses, only consumers. It hopes that it's pokedex will bring enough customers that businesses will be FORCED to list on their website and pay Lealfy money. Other than traffic, Leafly has no other pull with businesses. And we all know that traffic can fall tomorrow if Facebook or Google are better marketing channels. Also what if Dutchie decides to buy iHeartJane tomorrow? Well Leafly then becomes purely a very overvalued blog.
Monetization, is not in Leafly's genes and that's why the business is doomed.
In fact, I can't find the article now, but will tried to find it, Leafly has said it's goal is NOT to aggressively acquire customers (note customers are the businesses that list on the website) when Weedmaps and Dutchie are currently doing that exact thing. I can see Leafly being left in the dust when things settle as most dispensaries end up signing with Maps and Dutchie for their POS, and iHeartJane eventually does it's own thing or gets bought out.
Yoko herself has a legal background (which is great for navigating the regulations of each state), but that doesn't exactly create further confidence for this company to make money for investors. I don't have much confidence in her running the business.
Valuation
You can check valuation yourself but just look at Weedmap's revenue, POSITIVE EBITDA, and EV vs Leafly's and you can see Leafly is definitely overvalued.
Disclaimer
All of the stuff above should not be taken as 100% fact as I do not work in the industry and can only piece together stuff from news articles. Therefore what I see is subject to my interpretation. Do your own due diligence and double check my statements. I am not a financial advisor.
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