The cannabis industry has been in the middle of a major transition that has been highlighted by increasing interest in U.S. multi-state operators (MSOs) and decreasing interest in Canadian Licensed Producers (LPs). This trend marks a stark shift from previous years where Canada was considered to be the most attractive cannabis market.
The easiest metric to explain the trend is related to the amount of capital that is being raised or is available for companies. Canadian LPs do not have the access that they once had to capital markets and most of the capital that is being raised is in the form of debt.
When we compare the state of capital markets between Canadian LPs and U.S. MSOs, the numbers speak for themselves, and more money continues to flow into the U.S. market. We attribute the steady increase to the improving numbers that are being reported by leading operators and believe that our readers need to be aware of this.
Here are some key metrics of the five largest (by market cap) Canadian LPs and U.S. MSOs according to research from Technical420. We believe that these metrics are pretty impactful when you analyze each cohort of companies from a growth and a profitability standpoint.
- Revenue growth for the Canadian LP cohort is slowing and was in the low single digits when compared to the prior quarter. For the U.S. group of companies, revenue growth is ramping up and was more than 40% higher than the prior quarter.
- The total amount of revenue that was generated by the group of U.S. companies was higher than the group of Canadian companies in the quarter that ended on June 30. In the following quarter, the difference in the amount of revenue between the two groups increased by more than 200% and we find the rate of change to be of significance
- The best performing company from the Canadian group recorded a 23% increase in revenue when compared to the prior quarter. The top performer in the US group recorded a 72% increase in revenue and we find the difference to be significant
- The median for quarterly revenue growth for the Canadian and the U.S. groups were 2% and 31%, respectively
- The average revenue growth that was reported by the Canadian and the US groups was 4% and 41%, respectively
“Drugs” Are Winning the War on Drugs
Cannabis was a clear winner of the November general election and we are even more bullish on the U.S. opportunity under a Biden administration. The most significant potential catalyst for the U.S. cannabis industry is related to decriminalization, and this is a realistic expectation under President elect Joe Biden.
From better access to capital to the removal of tax legislation that is not business friendly, the U.S. cannabis industry is poised to be a major beneficiary of a change of administration. As it relates to the tax hurdles that would be removed when cannabis is decriminalized, 280-E is at the top of every U.S. operators’ mind.
280-E prevents businesses from deducting normal business expenses. The removal of 280-E would have an immediate impact on profit margins, and we are bullish on the impact that it will have on overall cash flows.
The decriminalization of cannabis would make it easier for companies to work with banks and financial institutions. This change would remove one of the biggest risks that U.S. cannabis operators face with having so much cash on hand. Most of these operators have been forced to use credit unions after having to constantly close bank accounts with small and large financial institutions.
By removing this potential risk from the U.S. cannabis industry, companies will have to spend less money on security, and we are favorable on the types of ripple effects that are associated with a change in federal cannabis legislation.
The Sector Is Looming on A Potential Massive Up-list
Another important change that would take place from a banking standpoint is related to the stock exchanges that companies trade on and the sources of capital available to operators. Currently, U.S. cannabis operators cannot list on stock exchanges, a direct result of cannabis being illegal at the federal level.
Technically, these stock exchanges would not be operating in the best interests of investors if they allowed these companies to trade while cannabis is still considered illegal at the federal level. Under a Biden administration, we expect to see leading U.S. cannabis retailers list on exchanges like the Nasdaq or New York Stock Exchange (NYSE).
Since cannabis is illegal at the federal level in the U.S., leading broker-dealers such as JP Morgan and Goldman Sachs cannot participate in private placements with leading firms. Once cannabis is decriminalized, we expect to see these financial institutions get involved in the sector and are favorable on the impact that this will have the growth of the industry.
Once big banks can participate in U.S. cannabis retail private placements, we expect to see a substantial increase in the average size of the financings. Although the ability to raise capital plays an important role in the growth of any industry, it is especially important in the cannabis industry. Many of these operators are creating large footprints in strategic U.S. cannabis markets and we consider this to be an important aspect of any sector.
High Barrier Markets Are Getting Rewarded
If you look at the performance of cannabis operators in states that did not put a cap on the number of licenses such as Oregon and compare it to a state that issued a limited number of cannabis licenses such as Illinois, you will notice that the limited license markets are much more attractive.
When comparing cannabis markets on the east coast to the west coast of the U.S., we found that there are a lot more states with a limited license structure on the east coast. In medical cannabis markets like New York and Florida, we find the limited cannabis license structure be attractive.
Based on the performance of Illinois and Michigan when the markets transitioned from medical to recreational, we are much more bullish on the growth prospects that are associated with a limited license market. We found the performance of these markets to be very attractive and believe that geographic diversity plays an important role for any cannabis retailer.
Major Legalization Tailwinds Ahead
After Mexico passed legislation that legalized recreational cannabis, the U.S. became sandwiched between two legal markets. We believe that the passage of legislation in Mexico represents an important development for the industry and shows that the stigma around cannabis is changing.
Although we are bullish on the international cannabis opportunity, we expect U.S. cannabis retailers to remain focused on the domestic opportunity in the near-term. Once major financial institutions start to back U.S. cannabis companies, we expect to see resources allocated to burgeoning international cannabis markets.
We believe the growth of the U.S. cannabis industry will create a threat for Canadian cannabis companies on the international side of the business. From a branding standpoint, the U.S. is known for producing leading brands in pretty much every industry. We expect to see a similar outcome in the cannabis industry and believe that we have already started to see consumers show a preference for U.S. cannabis brands.
The growth of Canada’s 2.0 cannabis market shows that there is significant interest in US cannabis brands. Many leading Canadian LPs have entered into strategic intellectual property agreements with leading edible brands and consumers have shown strong demand for these products.
Full Steam Ahead
Over the next three years, we expect to see drastic changes to the global cannabis industry and for the U.S. to lead the charge. Although Canada had a head start on the international side of the industry, we believe the demand for U.S. brands will prove to be too significant and are bullish on the potential for the industry under a new administration.
Over the long-term, we believe that the U.S. cannabis industry will prove to be the largest market in the world and expect companies to continue to record massive growth as the regulatory market improves.
If you are interested in learning more about the companies that are best positioned to capitalize on the changing landscape of the cannabis industry, please send an email to firstname.lastname@example.org to be added to our distribution list.
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