Beyond Amazon And Coca-Cola: Why Cannabis Is Catching Up To Blue Chip Stocks In Profitability

A recent report by Viridian Capital Advisors explores the valuation and growth prospects of cannabis stocks against those of well-established sectors like alcohol, tobacco, pharmaceuticals, healthcare products and food.

The report looks closely at the value and growth of 295 companies from 13 different industries to compare how much they're worth against how fast they're expected to grow over the next several years (Enterprise Value to 2024 consensus EBITDA multiples against 2023-2025 Revenue CAGR).

Undervalued Options

Multi-state operators (MSOs) within the cannabis sector demonstrate a compelling investment profile.

They are valued at an 8.24x EV/2024 consensus EBITDA multiple, a significant increase from 4.8x recorded on 6/24/22, yet this valuation is substantially lower compared to other industry groups.

Despite this, MSOs boast a notable 2024 EBITDA margin of 26.2%, showcasing their strong profitability amid a competitive landscape.

This places MSOs just behind tobacco giants with an EBITDA margin of 48.7%, pharmaceuticals at 36.8%, and alcoholic beverages at 28.1%, underscoring the sector's robust profitability in comparison to other key players in the consumer goods landscape.

In addition, this discrepancy highlights a significant undervaluation, particularly when considering MSOs' expected 6.3% revenue growth over the next two years—a conservative figure given the potential market expansions in states like Florida, Pennsylvania and Virginia.

Legalization Effects And Value Drivers

The cannabis industry's unique position is further emphasized by the overarching impact of regulatory environments, notably, the federal tax burden imposed by 280e, which prevents cannabis companies from deducting standard business expenses, a constraint not faced by companies in other sectors.

When the EBITDA of cannabis companies is adjusted to reflect the impact of these taxes, the valuation multiple shifts from 8.24x to a much higher 13.2x.

This adjusted figure mirrors the sector's financial health and is closely aligned with the 13.7x multiple projected in Viridian’s regression analysis, highlighting the sector's profitability despite regulatory challenges.

This adjustment is crucial for companies and investors alike, as it provides a clearer picture of the cannabis industry's financial standing, demonstrating its resilience and potential for growth even under stringent tax conditions.

Furthermore, understanding this adjustment is important for assessing the value, economic performance and investment appeal of cannabis companies and stocks. The report notes cannabis is a sector with “several potential catalysts that could materially affect value.”

Market Consolidation Ahead

The sector appears to be ripe with potential catalysts for growth, from legislative shifts such as rescheduling and potential legalization to industry consolidation opportunities. "We believe significant industry consolidation is still to come in cannabis. Even the largest MSOs are quite small by American industry standards. The average EV of the largest 10 MSOs is only $1.6B compared to $22B, $55B, and $127B for the Alcohol, Pharmaceuticals, and Tobacco companies," reads the report. 

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