Wedbush Analysts On Cannabis Challenges & Opportunities In 2023: Where Do We Go From Here?

This week's Institute of Cannabis Research Conference at the Grande Lakes Hotel & Resort in Orlando, Florida was attended by cannabis executives and analysts. One of the hot topics was the Secure and Fair Enforcement (SAFE) Banking Act, which was excluded from a large-scale spending bill.

After the proposal failed to make it into the National Defense Authorization Act (NDAA) earlier in December, the hope was that appropriations would protect banks that work with state-legal cannabis companies.

In their latest note published on Wednesday, Wedbush Securities' analysts Gerald Pascarelli and Antoine Legault shared the main takeaways from a three-day conference.

Challenges That Continue Into 2023: Federal Status, Banking & Pricing

Industry experts like Tim Seymour, portfolio manager of Amplify Seymour Cannabis ETF CNBS and Dan Muller, founder & CEO of Aeropay's cannabis payments platform shared their views about the direction of cannabis in 2023 with Benzinga's Nina Zdinjak. Wedbush's analysts said cannabis banking reform and marijuana's Schedule I status will mark the year ahead.

"Conversations around SAFE Banking and/or potential rescheduling or de-scheduling of cannabis will likely ebb and flow over the course of 2023," the analysts said, adding it "will likely prove to be much more of a "show me" story relative to the optimism that was seen from October through early December last year."

They noted that the lack of SAFE Banking would affect smaller businesses and operators in one state more than "tier 1 operators."

In addition to its Schedule 1 status and lack of access to banking services, the cannabis industry also faced declining marijuana prices in 2022.

"As has been the case for over a year, supply/demand dynamics and resulting price compression has been the key focus point from a fundamental perspective, which will continue into 2023." 

With illegal sales still thriving in many legal states, there was pressure on legal sellers to keep their prices competitively low. With retail and wholesale prices dropping and cultivators failing to establish the correct balance between supply and demand, the industry is likely to face various challenges.

Normalization of supply/demand imbalance and pricing can be expected as MSOs attempt to protect their balance sheet and cash positions by reducing Capex spending. Moreover, without cannabis banking reform, smaller operators will continue to lack access to capital, potentially leading to more consolidation.

CT Rec Sales Launch & Upcoming FL Market

Connecticut's legal recreational cannabis market officially rolled out on Tuesday, Sept. 10. Pascarelli and Legault expect the new market will generate $800 million in the next two years.

"We expect Connecticut to generate half the amount of sales as New Jersey by 2025," they said, adding that the move is expected to "provide incremental topline benefits" to cannabis operators Green Thumb Industries Inc. GTII GTBIF, Curaleaf Holdings Inc. CURA CURLF, and Trulieve Cannabis Corp. TCNNF TRUL, which are under their coverage.

Meanwhile, in Florida, the initiative to legalize recreational marijuana garnered 148,418 signatures as of last week, suggesting there's growing support for the push. For the proposal to reach the ballot in 2024, the initiative - led by the Safe & Smart Florida political committee - needs 891,589 signatures, plus 222,898 to push for a much-needed Florida Supreme Court review of the proposed ballot wording.

The analysts said that the Supreme Court would not decide on recreational cannabis before the year's end, at the earliest. However, the Sunshine State's medical market is among the best performers nationwide.

Legalization of recreational marijuana would be a significant "catalyst for the industry," with Trulieve seeing the "biggest tailwind," followed by Curaleaf," said  Wedbush Securities' analysts Pascarelli and Legault.

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