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Cantor Fitzgerald’s Pablo Zuanic says the U.S. cannabis industry has great value but is in a tight and defined investable pool.
But there’s hope: “We are confident about the regulatory tailwinds pushing the U.S. marijuana industry forward, taking a long-term view,” said Zuanic, however “in the near term, operators face macro pressures, limited funding opportunities, and runaway licensing in some states.”
SAFE Banking Act’s failure to materialize:
Zuanic said that without the SAFE Banking Act and a divided Congress, he is even more confident “of the durability, scalability, and long-term outlook of the larger and better-capitalized U.S. MSOs.”
However smaller operators could be excluded and “in some cases, new licensees may not even be able to raise capital to start operations,” Zuanic said in a recent note. “Still, the question of ‘investability’ (we do not mean fundamentals) remains a concern, with at best a TSX listing (and increased U.S. custody services?) helping in the next 12 months. Increasingly, we believe a rescheduling scenario by 3Q24 (not before) is becoming more likely, but that may delay/entangle other reform efforts in the interim.”
Top Catalysts For Building Momentum
Zuanic believes that the following catalysts will create headlines over the next one to two years:
- Revisions to the Farm Bill
- Passage of The Hemp and Hemp-Derived CBD Consumer Protection and Market Stabilization Act of 2021 (HR 841).
- U.S. MJ companies listed on the TSX
- U.S. companies acquiring Canadian assets
- Attempts to amend the IRS’s 280E Code
- U.S. exchanges listing U.S. plant-touching companies
- White House re-scheduling cannabis (or de-scheduling)
- Attempts to reintroduce (and pass) SAFE
- Comprehensive reform
How Will The Pie Be Divided?
Noting that the industry made significant progress in 2022, Zuanic named some of the companies that will likely take a piece of the market in the future. “20 years from now, the global legal cannabis industry could be worth $200Bn. How does the pie split? Like the tobacco/liquor/beer industries (consolidated) or the wine industry (fragmented)?
“A company with a 25% global wholesale share could generate $25Bn in sales by then ($200Bn x 0.50 markup x 25% share). If we assume 25% EBITDA margins and a 30x multiple (for a growing industry with high margins), then on an EBITDA valuation, such a company could be worth $190Bn. No company comes close to that,” he said. “The two largest market cap MSOs are Curaleaf CURLF ($2.9Bn) and Green Thumb GTBIF ($2Bn); only four other cannabis companies have market caps over $1Bn; among MSOs, Trulieve TCNNF and Verano Holdings VRNO VRNOF; among Canada LPs, Tilray TLRY and Canopy Growth CGC.”
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Image by El Planteo
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