OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 11/08/2024
Viridian Capital Chart of the Week: Are Analyst Estimates for 2025 and 2026 Overly Optimistic, or is the Market too Pessimistic?
- Third quarter 2024 earnings reports have been disappointing. Nine of the top 15 MSOs, accounting for approximately 86% of the group’s total market cap, have reported, and aggregate revenues and EBITDA missed by 3.2% and 2.3%, respectively, from what were already pretty downbeat projections.
- Still, analysts are expecting a 2.6% revenue growth for the full year 2024, based on a 1.6% growth in the fourth quarter compared to a 3.0% growth for the first three quarters. EBITDA is projected to be up 9.1% for the year based on a flat fourth quarter compared to a 12.4% increase for the first three quarters.
- Interestingly, despite the slowing trend in revenue and EBITDA growth, analysts are calling for 8.1% growth in revenues for 2025 and nearly a whole point increase in EBITDA margins, producing a 12% gain in EBITDA.
- These relatively optimistic projections seem totally disconnected from the reality that the group is trading at a lower multiple of the next twelve-month EBITDA than it was just prior to the original HHS rescheduling announcement on 8/30/23.
- Why is the market so pessimistic compared to the analysts? We believe we are looking at a “growth panic” as investors fret about where the oft-promised industry growth will come from.
- Growth challenges are real and include:
- Over 50% of the U.S. population lives in states that are adult-legal, but the pace of new states going adult-legal, which has been a big part of the growth equation, is now slowing. Florida whiffed, PA seems unlikely for 2025, and VA probably won’t get its act together until a new governor in 2026. So what’s left? Want to bet on New York getting its act together?
- Price compression has not gone away and is now attacking revenues in New Jersey and Florida.
- The capital crunch is still ongoing, and the entrance of new investors is hostage to regulatory/legal reforms.
- And the big wildcard: How much of cannabis’s lunch will be eaten by intoxicating cannabinoids? Consumers seem plenty happy with their ability to get high from convenience store fare, and the siren song of shopping online for delivery is powerful.
- Despite all of this, we find valuations unreasonably low. The market is priced for a catastrophe we don’t see heading our way.
