Not long ago, Akerna Corp. (NASDAQ:KERN) would have been a perfect mash-up of two industries – that is, cloud software and the cannabis sector. However, as seen in the past few months, the second half of the story has gone south. The cannabis industry has been in a grueling tailspin, as seen with the performance of operators like Tilray (NASDAQ:TLRY), Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC).
So as should be no surprise, Akerna stock has been quite volatile. The company went public in mid-June on the NASDAQ after an eight-month due diligence process with the exchange. On the first day of trading, KERN stock shot up above $15. However, as of today, the shares are trading at $9.
Consider that becoming public was not through a traditional IPO. Rather, Akerna merged into a SPAC (special purpose acquisition company), called MTech Acquisition.
Yet regardless of all this, what are the prospects for the company? Could KERN stock be a good way to play the cannabis sector?
Akerna Stock’s Background
Akerna’s origins go back to Jessica Billingsley, who saw how technology could transform the cannabis market. Prior to this, she had a successful career, having started her first company when she was only 22-years-old.
There are several parts of the Akerna platform. First, there is the MJ Freeway application that provides a seed-to-sale management tracking system for state-licensed dispensaries, cultivators, manufacturers and distributors. Think of it as ERP (Enterprise Resource Planning) for inventory and legal compliance. True, there are many other management systems on the market, like from Oracle (NYSE:ORCL) and Workday (NYSE:WDAY), but they do not handle the intricacies of the cannabis business.
Next, Akerna has Leaf Data Systems. This is focused on government agencies that need assistance with managing the complex regulations. The Leaf Data Systems application helps to effectively track plant, product and waste, allowing for maintaining quality standards.
In the latest earnings call, Billingsley noted: “For nearly 10 years, we have refined a technology that pinpoints every aspect of every gram of cannabis trapped in our system. The plot of land that is grown on soil nutrients, water and light intake, additional ingredients for manufactured product, when it was shipped out and in what batch and finally, where and when the product was sold and to whom.”
Bottom Line On KERN Stock
Even though Akerna is targeting an interesting category, there are some issues to keep in mind. First of all, monetization could prove difficult in the coming months. With the shakeout in the cannabis market, there will be fewer resources to make investments in new technologies.
Next, the government market is far from easy. The sales cycles can be long and the budgets are usually tight. What’s more, as of June 30, about 39% of Akerna’s revenues actually came from the government agencies of Pennsylvania and Washington. Akerna recently snagged Utah as a customer.
According to a recent regulatory filing with the SEC: “Further, even if a contract is awarded, there are strict procedures that government agencies follow when it comes to reimbursement of the costs incurred in the course of fulfilling contracts. Accordingly, it is possible that some or all costs might not be reimbursed under a government contract as contemplated by us.”
And finally, the revenue base is fairly small for a public company. In the most recent quarter, the top line hit $3.2 million, up about 39%.
Given the uncertainty in the cannabis market and the difficulties with government contracting, growth could be choppy. Thus for now, it’s a good idea to be cautious on KERN stock.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.