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TheCannalysts have documented some of the differences in cannabis legalization between the two countries. You’ve seen us mention many evident (and some less-than-evident) distinctions.
Some of it is within regulatory: a lack of a national licensing system in the US for one. Permits for sales is on a state by state basis – with each state adding its’ own inclinations and flavours to their operating environment. These can inhibit a businesses ability to photocopy efficiency from one jurisdiction to another. Licenses to production and processing facilities are bifurcated most places as well. An MSO can face conditions in two adjacent states that are unique operationally and in compliance across all three of these activities. From a commercial standpoint: that sucks.
While Canada does have different licenses for each, they are national. A US company may enter a state where all three pieces of the value chain present different economic reality.
Moats in some states, a wide open drag-strip in others.
Margins are dependent on this. Profits are dependent on taxes too. 208E applicability appear contingent in some places, a hard line in others. Depending upon the medical/recreational set up within a particular state, margins can also vary by stream.
Even at the consumer level, it can be different. I know that at one point in Florida, getting a medical card came with a fairly standard doctor’s fee of some $200, with the state itself charging an annual fee of some $50 to renew a medical card. In other medical states, this can be $0. Not really pertinent, but used as example.
A staggered path of legalization has created an uneven (and often slippery) surface for any MSO walking it.
All these factors impact how operations are managed and how costs are raised within each jurisdiction. They reflect a need for corporate support to be duplicated, and inhibits efficiencies from economies of scale being realized.
Despite us enumerating and pointing all of these ‘features’ out – from the top level – they don’t really matter. Despite adding complexity and redundancy: these are be manageable and mitigable (to varying degrees). In this context, I’m talking about the the investor.
In the case of business and publicly listed outfits, adapting is what they do: acknowledge varying sets of conditions, allocate capital, try to operate more efficiently than peers, and derive superior returns from the activity. In the case of success, stock price goes up, shareholders rejoice.
No. These are not the ‘biggest’ distinction between the two countries path to legalization. For the investor (and ultimately asset valuation), the most impactful commercial distinction is where the starting blocks have been set.
In Canada, the only business model that existed prior to legalization was the black market. Cannabis companies (most anyhow) had to begin forming out of air. The term ‘pre-revenue’ entered the lingo, as companies had to wait for the starting gun to go off. The recreational industry – and every business model being touted by it – was unproven and untested. Margins were guesses, sales estimated. Expected rates of return? Good luck. How big is the market? How long will the black market continue, and at what level of intensity?
There were no earnings or operational history to rely upon for asset valuation. Commerce was simply doing what it does…they went out and raised a whack of cash, and quickly deployed that whack. This has resulted in an overbuild of capacity <An aside, this is why I still poke fun at relying on DCF for valuations. They’re useful and make sense. But anyone using them best know how assumption laden a number coming out of them is).
Contrast that with the US. Yes, they use DCF (shamelessly) to promote particular valuations or highlight ‘potential’. But.
‘Legacy’ states (WA, CO, ORE, CA) have 6 (!) years of operational data. A dozen others have as long-lived medical supply chains: with several ‘medical only’ markets (like FLA) effectively emulating recreational markets themselves in several respects (albeit with participant and velocity restrictions, natch).
US companies have years of operational data and financial statements. Sure, some companies are ripping it up (some not so much). But the real result of this all is in the capital markets.
Rather than raising cash against a literal unknown – the US has demonstrable results. We can already see state-by-state performance on both the company level and to profitability. There is no ‘pre-revenue’ at this point, excepting perhaps states that offer neither medical nor recreational cannabis (there’s 2 in case you didn’t know).
Sure, one can muse whether Idaho may eventually become a limited licence jurisdiction, or not. Or whether Arizona will enact a special excise tax on recreational weed. Companies can and will mitigate. Some will have far better margins than others, but this isn’t the point.
The point is that the vast majority of Americans aren’t participating in investing. When they will finally be able to freely – and without friction – hoo boy. That’s why many are so giddy about future prospects right now. And those folks have actual operational and profitability data to go on. It’s why companies are seemingly able to raise in the US simply by contemplating it. It’s why there doesn’t need to be 60 warrants given out along with a 13% interest rate in exchange for a $1,000 convertible debenture priced at a 10% discount to market. Many in the US are doing bought deals purely on share price at market. That $275MM overnight raise by $CURA is exhibit ‘A’ in this regard.
Capital began drying up in Canada when it saw the returns from legalization that were expected…..remain air. Raises got more expensive. Fast. And TheCannalysts see the consolidation that’s beginning in Canada being driven by the desire to buy earnings, to gird against a continuance of relatively low margin and combat gratuitous over-supply.
I hope the reader can see the implications of this that GoBlue and I do.
The US going forward isn’t being created out of air. In some cases it’s proven. In others….it’s promising much more than that in terms of potential.
Free your mind of creating too many parallels between the two countries. Sure, American companies will have to navigate many one-offs and nested inefficiencies across jurisdictions. That might crimp margins, but companies will sort that out. Because that’s what companies do. And those that are the best at it will demonstrate it. Indeed, they just beginning to.
We’ll see breaks in valuation against share price, when DCF exuberance supplants operational history. At the very least, we’ll have data that shows operations in both nacsent and ‘legacy’ markets. This wasn’t the case in Canada.
Re-scheduling and access to banking are major impediments to growth, and if they happen, it’ll change the dynamics. For now, we have enough to see an industry in operation, rather than the promise of one.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative.
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