OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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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 09/30/2022
How is the Market Valuing Cannabis vs. Tobacco, Alcohol and Pharmaceutical Sectors?
- Faced with challenging industry dynamics, economic headwinds, and unresolved doubts regarding any federal regulatory reform, investors have become less willing to pay for rosy EBITDA growth projections.
- The chart is based on data from 253 companies, arranged into ten industry groups. Several industries are often compared to cannabis, including Alcoholic Beverages, Tobacco, and Pharmaceutical Drugs. To aggregate data for each industry, we summed all enterprise values and EBITDA. The green line (measured on the left axis) shows enterprise value to 2023 consensus EBITDA estimates. The orange line shows the projected growth of EBITDA between 2022 and 2023.
- U.S. Cannabis MSOs have the lowest EV / 2023 EBITDA values of any of the groups, and it is tempting to read this as an endorsement of the undervaluation of the sector. Another possibility, however, is that the market doesn’t believe the analysts’ projected 77% growth rate in cannabis EBITDA for 2023. Looking at 2022 multiples tells a different story: Recreation, Retail (special lines), and Tobacco are all within .3 points. Investors are right to question analysts’ 2023 projections as they have already been reduced by 37% YTD and still don’t adequately account for margins pressures from inflation and wholesale pricing weakness.
- The market is ascribing the highest 2023 multiples to sectors that don’t need much growth to achieve their 2023 projections.
- With the tremendous uncertainty surrounding the industry and economy, investors would be wise to “bullet-proof” their portfolios with companies that neither require additional capital to survive nor significant growth to provide value. High EBITDA growth is still likely, and the SAFE act is still our base case, but they should be happy surprises, not the primary investment thesis.
