You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
At the beginning of 2020, we expected Q3 financial reports for American cannabis operators to be very strong with the vaping crisis long behind us, but we certainly had our doubts when the pandemic hit. We reiterated our bullish outlook in May, and we have been reporting strong demand for legal cannabis for many months subsequently. Still, the growth that the leading publicly traded companies demonstrated in Q3 has exceeded our greatest expectations.
For those not paying close attention, New Cannabis Ventures provides a handy scorecard in its Public Cannabis Company Revenue & Income Tracker. The top 10 American companies in terms of reported quarterly revenue, which ranged from $45.5 million to as much as $352 million, all showed double-digit sequential growth:
Of these ten companies, seven are MSOs (combined Q3 revenue of $784 million), two are ancillary, and one, GW Pharma, sells cannabis-derived FDA approved medicine. Not a single company reported below analyst expectations, and some blew them away. An important sign of the maturation of the industry is that the majority of these companies are producing positive operating profits, with all of them improving from Q2. Most of the companies beyond the top 10 are also exhibiting strong growth and improving profitability.
One of big takeaways we have is that it’s becoming increasingly important for investors to understand the geographical exposure of the companies in which they invest. We note that acquisitions boosted the revenue growth for Columbia Care and Curaleaf among the MSOs, but the strongest organic growth was from operators in supply-constrained markets. For example, GTI and Cresco benefited from new production capacity becoming available in Illinois and Pennsylvania, though their growth was also supported by strength across their operations. One challenge analysts are encountering is that most companies aren’t providing granular detail regarding revenue generation by geography or, perhaps more importantly, gross margins or EBITDA margins by state. Still, listening to the calls has been very helpful in assessing the overall market dynamics state-by-state.
Our second observation is that management teams remain very optimistic about the near-term trajectory of their business. A universal refrain was the challenge of how to pick which market merits the most additional capital investment for expansion. With that said, we were disappointed that so few companies provided guidance for 2021. The two ancillary companies above both did so, but none of the MSOs did. We had expected especially Curaleaf to check off on the $1.3 billion consensus, but it punted until its Q4 report, citing too much uncertainty about the timing of Arizona and New Jersey implementing their new adult-use programs. TerrAscend joined Jushi Holdings in being among the only MSOs providing 2021 outlooks when it reported last week. Among ancillary companies, KushCo Holdings has provided its revenue and EBITDA outlook as well.
Finally, we couldn’t help but notice how much tax the MSOs are paying. We discussed the punitive nature of 280E three months ago. The effective tax-rate for Trulieve, for example, was 82%. 280E won’t last forever, but, as long as it does, it is robbing the industry of capital that could be reinvested into the business.
As we approach the Thanksgiving Day celebration this week, we want to take a moment to thank our readers for your continued support. We also want to express our gratitude to all who are advancing the cannabis industry, including those who are voting to legalize at the state and local levels, the regulators who are overseeing the industry grow responsibly, those providing capital to the industry, the patients and consumers who are pushing companies to be better and especially to the people who are working in the industry to help it fulfill its promise. We were deemed essential, and the operators proved we deserved that honor. This has been a year of great challenges, but also one of tremendous opportunity.
Ayr Strategies is an expanding vertically integrated MSO, focusing on high-growth markets and is one of the most profitable vertically integrated cannabis companies with anchor market positions in Nevada and Massachusetts and with recent entry into Pennsylvania, Ohio and Arizona through acquisitions. The company cultivates and manufactures branded cannabis products for distribution through its network of retail outlets and through third-party stores. Ayr has a strict focus on limited license & highly populated states with a robust pipeline of M&A opportunities by virtue of being the acquirer of choice.
Get up to speed by visiting the Ayr Strategies Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
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Alan & Joel