Could Vegas Cannabis Lounges Make This Stock a Buy?

State-level cannabis markets are changing rapidly, and new rules are to credit for the fresh opportunities that are emerging as a result. On June 28, the Nevada Cannabis Compliance Board announced that it had given the green light for a package of regulations that established licenses for cannabis consumption lounges in the state.

Though the consumption lounges will be restricted to offering marijuana products and water (rather than also offering alcohol) on-site, regulators expect some businesses to start operating their lounges before the end of the year, after licenses are distributed in the fall.

All of the above is a massive tailwind for one cannabis retailer in particular: Planet 13 Holdings (PLNH.F -1.40%). Planet 13’s flagship superstore is located near the Las Vegas Strip, a conflux of tourism — and tourists are exactly the experience-seeking types to flock to a new consumption lounge in droves. More than a million people visited its store on the Strip in 2021, and that sum will likely increase as travel returns to pre-pandemic norms.

But could the new regulations and the superstore’s favorable location make the stock worth buying?

The new regulations will almost certainly juice the top line 

In case you’re not familiar with the concept, cannabis consumption lounges are simply areas where people can legally purchase and consume single-serve cannabis products. Much like in a restaurant or bar, customers are typically prohibited from bringing outside food, drink, or cannabis. The new regulations in Nevada mean that the state’s marijuana operators can set up new facilities to sell their products in a new context.

For Planet 13, the changes are very welcome, as a big part of its pitch to customers is that shopping at its Las Vegas superstore is an experience in and of itself, rather than just a means to the end of procuring marijuana. In 2021, its superstore brought in $114.5 million in revenue, accounting for almost all of its total revenue of $119.5 million. But not all of that was from cannabis sales; the store also has a restaurant, art installations, and a portion of the factory floor open to tours. And soon, it’ll likely have a consumption lounge or two to capture additional sales from passerby.

The company already built out one lounge in its superstore complex, and now it’s just waiting for its license from the state. Let’s do some quick back-of-the-napkin math to get a feeling for how much the lounge might be worth to shareholders, as it’s a big factor in whether the stock is worth purchasing this year.

How much could a lounge add to the top line?

Given that more than 1 million people visited the superstore on the Strip in 2021, let’s use that figure as a starting point to estimate the revenue impact of a new lounge opening. 

If we assume that only 5% of visitors will be interested in spending time at the consumption lounge, that makes for 50,000 people. Next, let’s also assume that Planet 13’s consumption lounge products will be priced similarly to the cocktails at nearby Vegas bars, so we’ll say around $20 per item. That’s a reasonable assumption because that price point is what other consumption-oriented establishments are using to make their margin and keep paying their overhead to stay in business. 

Finally, if each person buys one product and doesn’t return for another round of cannabis, we can calculate that the company will make a grand total of (drumroll, please) $1 million per year, or less than 1% of Planet 13’s 2021 top-line figure. Of course, there’s no guarantee that the business will draw in the same number of people or price their products in the way that I estimated, so the final revenue figure after a year of operating the lounges will probably be different in reality. Still, it’s clear that even with quite a few people opting to visit the company’s consumption lounges annually, it wouldn’t be a major factor in driving Planet 13’s growth.

Therefore, the new regulations aren’t a valid reason to invest in the stock when considered on their own. But when paired with the other areas of expected revenue growth, like growth from its plan to open a handful of new superstores across the U.S., the lounges could be an ancillary point in favor of buying the stock.

Stay tuned to Planet 13’s quarterly earnings over the next year to see if consumers are flocking to consumption bars in enough numbers to drive significant growth. Until then, there are more compelling, faster-expanding businesses to invest in.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet 13 Holdings Inc. The Motley Fool has a disclosure policy.