Cannabis Industry: Could We Be Valuing Growth Incorrectly?

• It is no secret that the general market is in the midst of a dramatic rotation out of growth and into value investments. There are at least two reasons for this strategy change: 1) In a higher rate environment, future cash flows are valued less, and 2) In a highly unsettled economic environment, risks to projected growth are heightened.

• These factors along with the inherent weakness of valuing companies based on future EBITDA have caused us to rethink the value of growth. Consider the following thought experiment: Two companies have identical EV/ Projected 2023 EBITDA multiples. One company has a projected 20% growth in revenues between 2021 and 2023, while the other has a 100% projected revenue growth.  Which stock would you rather own? Our knee jerk reaction of course is to grab at the company with a 5x higher growth rate. But consider this, the high growth company HAS to achieve that growth in order for its projected multiple to be realized, whereas the smaller growth company doesn’t have as far to go to get to the same place. Also consider that growth may require financing and potential dilution which isn’t picked up in the multiple. How many extra shares will the high growth company have to issue to achieve that growth?

• So maybe we have been thinking backwards? 

•  

• The graph above was created by screening the Viridian Value Tracker database to include only companies with the following characteristics: 

  • U.S. Cultivation & Retail companies

  • Market caps over $100M were considered

  • Debt/ market caps of under 1x

  • Only companies with Analyst forecasts for 2023

• We then multiplied the consensus EV / 2023 EBITDA by the 2021 to 2023 revenue growth of each company. The multiples of higher growth companies were thereby adjusted upward.

• The green bar on the graph shows the most attractive companies on an adjusted basis. The orange line shows the unadjusted EBITDA Multiples.

• A number of Viridian covered names with buy recommendations appear on the left, including Tilt, MariMed, Schwazze & AYR.

 

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Photo by Javier Hasse.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.