OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
Quick
Links
Past Charts
Chart of the Week
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 01/25/2025
Viridian Capital Chart of the Week: Cannabis Valuations Relative to Other Industries Revisited
- The chart shows Enterprise Value to 2025 consensus EBITDA multiples on the vertical axis against 2024-2026 Revenue CAGR on the horizontal axis for fourteen different industry groupings, including Tier 1 &2 US MSOs and large Canadian LPs.
- We last explored this topic in the 4/21/24 Viridian Capital Chart of the Week and wanted to investigate the impact of the changing rescheduling expectations on the industry’s relative positioning. Cannabis stocks staged a minor bounce on Friday from an all-time low reached earlier in the week.
- We used data from 277 companies organized into 14 different industry categories. The assignment of companies into industry groupings follows the work of Aswath Damodaran, a noted finance professor at NYU. Valuation multiples and revenue growth rates were calculated by aggregating all companies in the industry group before calculating the respective ratios. Cannabis sectors are represented on the chart in green circles.
- The seven Tier 1 US MSOs have an expected 5.6% compounded revenue growth rate for the next two years, from nearly 30% when we did this analysis in mid-2022. Tier 2 MSOs have a virtually identical expected growth rate of 5.5%. The failure of adult rec in Florida and delays in passage/implementation of adult rec in Pennsylvania and Virginia have been factors in reduced growth expectations. One hopeful sign is the fact that New York finally seems to be gaining better control over its illicit market and opening dispensaries at a faster pace. Still, wholesale price compression is an ongoing reality, and the number of large states that have not yet passed recreational cannabis is shrinking.
- The Tier 1 group has a 4.16x multiple of EV/ 2025 consensus EBITDA (compared to. 8.24x in April 2024). It is significantly lower than any other industry group despite its expected 2025 EBITDA margin of 28.0%, the fourth-highest behind Tobacco (50.0%), Pharmaceuticals (39.9%), and Alcoholic Beverages (28.6%). Large Canadian LPs trade at 11.2x, more than twice the valuation of their U.S. counterparts.
- We note, however, that cannabis EBITDA is not strictly comparable to the other sectors due to the impact of 280e. Deflating EBITDA by 5/8 to account for relative tax treatments (admittedly a very rough approximation) would produce a 6.7x multiple, still far below the other industry sectors, suggesting that other factors, such as access to senior exchanges, make up a significant part of the remaining valuation differential.
- The relative valuation disparity between cannabis and other sectors has never been wider and speaks of investor despair over the pace and outcome of cannabis regulatory and legal reform.
- It will require real action in Washington to rescue the industry from its morass. Let’s hope Trump’s pro-rescheduling and legalization rhetoric was more than just campaign trail talk.
