Cannabis Stocks: How Low Can Multiples Go? Check Out This Chart

Cannabis stock prices and valuation multiples have been trending downwards since peaking in mid-February 2021. The graph shows Enterprise value to consensus next-twelve-month EBITDA for the companies that currently have over $750M in market cap.

• Included are Ascend, AYR, Columbia Care, Cresco, Curaleaf, Green Thumb, Jushi, TerrAscend, Trulieve, and Verano. Several of these companies were not public for the entire period in the graph or did not have analyst estimates. We have included each company from the earliest date that both enterprise value and EBITDA estimates were available.

• For most of the period in the graph, multiples fluctuated around 15x. They spiked upward in February 2021 on renewed hopes of federal legalization and have drifted lower ever since, despite improving profitability and cash generation, proven access to both debt and equity capital markets, strong cash positions, scaled operations, and the near-certainty of legalization, albeit with an uncertain timetable.

• The market is likely to get an upward boost from news that the Safe Act will be attached to the America COMPETES (Creating Opportunities to Meaningfully Promote Excellence in Technology) Act of 2022, a domestic spending bill. We doubt that the bill will get any further now than before, but it is likely to give the market a temporary boost.

• What is the fundamental value argument for higher multiples? We constructed a conservative DCF model using analyst estimates for 2022 and 2023 for the group in the graph. We projected legalization in 2025 and a spike upward in growth. With legalization, we projected two years of increased growth followed by slowing growth for the following years as cannabis normalizes into a regular consumer staple. One of our scenarios included declining EBITDA margins matched with lower capital costs. The slowing growth and declining margins post 2026 scenario produced EV/ 2022 multiples in the 9.5x-10x range which we view as a strong downside support level. We find it relatively easy to justify multiples in the 15x range with less draconian assumptions. The macro headwinds are considerable, but multiples are in excellent value territory. Legalization or banking reform is likely to bring new investors into the cannabis market with positive effects that are challenging to model in a discounted cash flow analysis.

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 and hemp industry. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Industry Sector (one of 12 sectors, from Cultivation to Brands)

• Dollar value of the transaction

• Region in which the deal occurred (country or U.S. state)

• Status of the company announcing the transaction (Public vs. Private)

• Deal structure (equity vs. debt)

• Key deal terms (Pricing and Valuation)

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.

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