Cannabis Chart Of The Week: The Market Is Finally Realizing The Superior Value Of U.S. MSOs

• U.S. Tier one MSOs are finally trading at higher revenue multiples than their Canadian peers.

• The orange line on the graph shows the EV/NTM Revenue multiple of the ten largest Canadian LPs by market cap. The blue line shows the same ratio for the ten largest U.S. MSOs.

• The multiples of both groups spiked in early 2021 when a new Democratic Presidency and Senate majority led many investors to believe imminent action on Federal legalization of cannabis was imminent. Interestingly, Canadian multiples rose significantly more than U.S. multiples on the notion that the U.S. market might be opening for them.

• The current constrained financing market has revealed the weakness of the LP strategy: waiting for legalization while bleeding cash. It is becoming increasingly apparent that some of the formerly robust Canadian may not have the financial capacity to make a sizeable U.S. market entrance by the time it is allowed. Some continue to burn so much cash that long-term survivability is in question. 

• Canadian LPs with the highest cash burn have been hit particularly hard. The enterprise values of Canopy Growth CGCWEED, Cronos CRONCRON, and Aurora (NASDAQ; ACB)ACB, are down 87%, 96%, and 87% respectively from their February 2021 highs.

• The apparent issue is profitability. Five of the 10 Canadian LPs have consensus estimates of negative EBITDA  for the next twelve months. In contrast, none of the U.S. companies are projected to be negative and, as a group, are expected to have about $2.6B in EBITDA.

• Legalization may challenge the U.S. companies who currently are protected by limited licensing state fiefdoms. We continue to believe this status quo will last for the next several years. In the meantime, the U.S are achieving higher growth with significantly higher margins and amply deserve to trade at higher revenue multiples.

• It will be interesting to see how markets react to the next wave of legalization speculation.  

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

Photo by Javier Hasse.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.