Things certainly look dim for many businesses operating in the legal cannabis sector in the US. And some Wall Street firms opine that things will be no different in 2022. That is the prediction of a report prepared by Viridian Capital Advisors. Based in New York, the firm looks after financial and strategic advice exclusively for firms engaged in the capital market. The key takeaways from the report will be:
Low Valuation Will Continue
This article has Viridian’s recent report as its base. Unfortunately, the report falls short of painting an all-rosy picture of Cannabis in 2022. This makes things worse when you include that 2021 wasn’t that good for manufacturers and investors with cannabis stocks. Enlisted Cannabis firms now trade at 2.3 regarding EV (Enterprise Value) to sales multiple. The figures for the EV to EBITDA, which refers to Earnings Before Interest, Taxes, Depreciation and Amortization, are similarly disappointing, standing at 8.0. The statistics are nothing short of shocking when you consider the 4.1x and 16.4x 2020 figures for the two ratios in the order we mentioned before.
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As per the report, the scarcity of institutional investments resulted in price compression. According to the experts at Viridian, it is imperative to resolve this problem to ensure an upward-slanting financial graph for the industry. It is improbable that federal laws will be changed until after the 2022 midterm elections. Such change, in turn, is essential to facilitate institutional investment besides opening up the greater US banking system to entrepreneurs wanting to operate in the cannabis industry. Delays in creating new legal recreational marijuana consumption markets are another significant factor. However, as more institutional investors jump into the fray and the current growth initiatives start bearing fruit, the financial graph is expected to shoot upwards once the storms and stresses have passed and we have more legal clarity on Cannabis.
A Good Proposition for Long-term Investors
Though Viridian predicts flat margins, the firm also predicts revenue growth for the cannabis market in 2023 and 2024 at a significant 25% annually. As a result, the EV/EBITDA stock trades are expected to stand at 5.7x and 4.6x for 2023 and 2024.
Such figures can be compared to far mature industries. However, the bright side is that year-over-year growth is expected to be a handsome 58% in 2022. Of course, as they say, what is conjecture and assumption is just that. But the basis of such beliefs is rooted in reality, making 2023 and 2024 landmark years of an emerging, booming and thriving industry.
So investors who have a long-term outlook on their stocks should take a keen interest in the industry. There simply aren’t that many sectors where the number of operating firms can potentially double within just two years.
Interesting 2022 Predictions Made by the Report
- The dominance of big multi-state operators will be heavily impacted by relatively more minor players.
- The industry will continue to consolidate at a faster pace.
- Blocks in legal consumption of recreational marijuana in states will continue to dissolve, but that is not expected to significantly affect stock returns.
- The diminishing prices of cannabis flowers will benefit by creating fresh opportunities for new entrants and negatively affecting the industry.
- The tremendous institutional interest in the cannabis market indicates, to some extent, the likely scenario for operators once it has been legally granted access to the banking sector.
- Operators of all sizes will find debt to become cheaper and easier access to capital will power industry growth and lead to significant acquisitions and mergers.
- US cannabis firms will look towards opportunities abroad.
- Competent operators are expected to guard against interstate sales.
Financial Trends
Viridian estimates a $12.7 billion capital inflow into the cannabis market till December 24th of last year. This is a significant $1.4 billion less than 2018 figures which was the previous peak year. On the other hand, the industry capital raises increased by over $1.9 billion, a whopping 60% jump. But the fact that made many of the figures lose their sheen was the significant debt existing in the US cannabis industry. The debt figure stands at $3.4 billion for US markets, a considerable 806% increase from 2018. Internationally, capital raises for the cannabis industry fell by quite a bit. Canada reported a fall of capital raise of a whopping $5.9 billion or 76%. The international percentage figures are similar, with total capital raises plunging by 80%.
CBN Takes the Front Seat
The minor cannabis component Cannabinol, popularly abbreviated as CBN, took center stage in the Cannabis industry this year. One must distinguish it from CBD or cannabidiol. Both are forms of Cannabinoid compounds but are distinct from each other. The growth of CBN-based cannabis products was greatly facilitated due to the new, quicker methods of CBN production that emerged. Sometimes if not often, CBN is used along with THC to aid people in getting a night of better sleep. The facts show that CBN accounts for 14% of all retail sales of cannabis edibles used for recreation in California. This growth is set to expand further besides the trend spreading to other recreational cannabis markets.