Amid Challenges, Analyst Advises Investors To Build Positions: Cannabis Is A Real Industry With $26Bn In 2022 Sales

One of the biggest struggles the cannabis industry still faces is the lack of financial services. Under existing federal law, financial institutions are not allowed to provide their services to marijuana businesses even in states with legal cannabis programs.

When lawmakers decided not to include marijuana banking reform in the National Defense Authorization Act (NDAA) defense bill in December, it became kind of clear that these issues are not going to be resolved anytime soon.

The industry feels this on a regular basis.

And, it's not just a question of marijuana banking reform. The thing is, if the majority of lawmakers are not ready to enact this piece of legislation, they're less likely to support major reform such as medical or recreational marijuana legalization on the federal level.

‘This Is A Real Industry’

Cantor Fitzgerald’s Pablo Zuanic analyzed current state trends in his latest analyst note. He summarized the existing situation as “depressed stock valuations, lack of actual progress on the federal reform front, price deflation in cannabis, and presumably a weakened cannabis consumer (trading down, reducing back size) all make for pretty negative sector read.”

Taking the lack of capital access into account, multi-state operators might see more consolidation moves, Zuanic noted.

“Lest we forget, however, this is a real industry ($26 billion in sales in 2022), generating jobs and tax revenue (companies effectively pay 70% of profits in taxes; add to that sales taxes), and one that continues to grow as more states legalize.”

Zuanic added that a minimum of four U.S. companies have already hit $1 billion in sales or higher. With these figures in mind and other states starting recreational sales, the U.S. cannabis industry is on track to reach $28-30 billion in sales for 2023.

“Still, when the multi-state operators start reporting fourth-quarter numbers on Feb. 28th (in our coverage, Green Thumb Industries Inc GTBIF reports first), we assume the message will be one of caution, with companies prioritizing profitability and cash flow in a tough macro sector with seemingly little near-term growth.”

Zuanic recommended that investors “build positions, albeit taking a 2-3 year view.”

State By State Recap

Zuanic highlighted that in most states cannabis sales are flat to down, probably because of deflation, with only Florida seeing sales growth sequentially in the fourth quarter.

Illinois: $494 million in 4Q22 sales, up by 3% year-over-year. The Illinois market continues to grow and should get a boost as more retail stores open. Of concern, increased supplies have more recently impacted pricing.

Arizona: $443 million in 3Q22 sales; the analyst projects $451 million for 4Q22. Arizona has one of the lowest flower prices in the country. With average revenue per store at $12.7 million, Zuanic believes it has “retailer economics” that are favorable compared to other states.

Maryland: $119 million in 4Q23 sales; voters approved recreational sales in November but it's still unclear when recreational sales will start. The sales decline could be attributed to patients waiting for the start of adult-use sales. The number of medical marijuana patients is growing.

Florida: $469 million in 4Q23 sales, retail prices on the decline due to the increase in stores and supplies. The earliest the Sunshine State could see adult-use sales is mid-2025.

Pennsylvania: $375 million in 4Q22 sales; no growth here with wholesale price deflation, but there is still robust retailer economics. The state still only has a medical-marijuana market, but there is the possibility it could go recreational at some point in the future.

Nevada: $195 million in 4Q22 sales; price deflation is the main issue here, even though wholesale prices are almost 2.3x those of Arizona.

Massachusetts: $446 million in 4Q22 sales. While the market is generally stable in terms of sales, the proliferation of licensing has weakened producer and retailer economics. The main challenge for operators is scaling, as rules limit licenses to 3 stores and the cultivation cap is set at 100,000 sq. ft.

Ohio: $109 million in 4Q22 sales, despite the slowing market growth, the economics remain robust and retail prices are among the highest in the country. Revenue per store of $7 million is solid for a medical marijuana market.

Missouri: $111 million in 4Q22 sales, recreational sales will begin on Feb. 6th with all 195 existing dispensaries expected to soon be part of the adult use program.

Michigan: $635 million in 4Q22 sales, a large market with poor economics although prices may be stabilizing. While at first glance, a large and robust market, 830 stores indicate low revenue per store of only $3 million. What’s more, prices are on the decline.

Other states that recently became recreational include Connecticut, New Mexico and New Jersey.

Virginia: We do not have good data for this state, but patient enrollment continues to increase, and rec sales are expected to begin by 1/1/24.

New York: So far only two recreational stores have opened. There are 40 registered medical dispensaries. We do not have med sales data for the state.

Photo: Courtesy of Christina Winter on Unsplash