North American Cannabis Market: Is Interest Waning In Canada And The US? Here's What A New Report Says

As Benzinga recently reported, sales growth in Canada appears to be stagnating for the cannabis sector. According to Cantor Fitzgerald's Pablo Zuanic, the Canadian adult-use cannabis market “continued to decelerate in the third Quarter of 2022 when taking Year-Over-Year (YoY) trends, with Quarter on Quarter (QoQ) sales up 3%.”

In the United States, several cannabis multi-state operators (MSOs) are using different strategies to win the struggle against the illicit market. Since the beginning of the year, as an example, cannabis giant Tilray Brands Inc TLRY plunged 32.61%, Canopy Growth Corp CGC slid 38.60%, Curaleaf Holdings Inc CURA CURLF sunk 32.88%, Green Thumb Industries Inc GTBIF dived 38.02%, and Trulieve Cannabis Corp TRUL TCNNF fell 46.03%.

Cannabis Market In North America: A New Report

According to a new report, Canadian licensed [roducers (LPs) are down 48% YTD (year-to-date) and US MSOs are down 54%.

“Is the buzz gone?” asks the report published by AllianceBernstein. “In the short-term, yes, as Canada goes through growing pains and US legalization efforts are patchy at best,” said the analysts noted that the potential of sales and profits from legal marijuana is "a tantalizing thought for investors, though the sector hasn't been for the faint-hearted."

However, in the long term, analysts said they see, with or without legalization, both "meaningful and underappreciated growth" in the US and continued growth in Canadian marijuana spending. "But buyers beware, it will be a messy and wild trip (pun intended) to get there," said analysts Nadine Sarwat, CFA, and Senny Oh.

The report estimates Canada's weed total addressable market (TAM) at C$8.5bn by 2027 or a ~14% CAGR growth will come from both conversions from the illicit market and new marijuana consumers.

They also say the most common questions of the cannabis industry include:

• Which product types will dominate?
• Concentrated or fragmented market?
• Can consumer perceptions change after decades of ‘Just Say No?
• Where will regulation end up?
• Can Canadian LPs meaningfully improve profitability? “Net, while the market still has meaningful expansion left, it will continue to experience growing pains,” per the report.

The US is the real prize: "A cannabis TAM of $56bn without federal legalization (...) and $90bn with it! We estimate that, even without federal legalization, the US legal cannabis will be a ~$56bn market by 2027," the analysts said. "This is the same size as the US wine and US spirits markets and roughly half the size of US beer."

If/when cannabis legalization happens, they see ~$90bn legal cannabis TAM. "We firmly believe legalization is a matter of when, and not if. But while there are many green shoots (CAOA, MORE Act, SAFE Banking Act & Biden's review of Schedule 1 status), Washington remains in gridlock for now."

Minimize Harm And Maximize Benefits: Marijuana Legalization Now

Moreover, they believe that "prohibition leads to worse outcomes, and that consumption risks should be put into perspective."

But crucially, they contend that "thoughtful regulation to minimize harm and maximize benefits is critical and that corporates must lean into earning their 'license to trade'."

"Is the buzz gone?"

"For Canadian LPs, yes. But US MSOs screen as cheap," according to the report. Also, as an example, analysts say Tilray Brands Inc TLRY (MP, TP $3.90) is fairly valued. "It has a diversified business model, best-in-class margins, and a strong footprint in Germany. This is offset by a dilutive distribution business, cannabis share loss, and FX headwinds."

Cronos Group CRON (MP, TP $3.00) also is fairly valued, with "very strong topline growth from its edibles being offset by negative earnings for now, though it has a healthy balance sheet."

However, they view Canopy Growth Corp CGC (UP, $1.50) as meaningfully overvalued. "Its cannabis portfolio has faced similar challenges as TLRY, but it has the worst gross margins in our coverage. Biosteel is a bright spot."

Canopy Growth recently announced that it is consolidating its U.S. assets into a new holding company to accelerate its entry into the US market. The company claimed that the creation of Canopy USA will help it cut costs and access the US market, which is projected to be more than $50 billion by 2026.

Nonetheless, "Until US federal legalization occurs, no cash will flow from Canopy USA to Canopy Growth Corp., which continues to burn cash," the analysts affirmed. “We believe it will need to issue additional equity in the near future. We see a meaningful downside to the name. In contrast, US MSOs screened as meaningfully undervalued,” they concluded.

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Photo: Courtesy Of El Planteo