The marijuana industry simply keeps making history in 2018. So far this year we have:
- Witnessed Vermont OK the use of recreational cannabis entirely through the legislative process.
- Watched as GW Pharmaceuticals became the first cannabinoid-based drug developer to get a cannabis-derived therapy approved by the Food and Drug Administration.
- Observed as five prominent pot stocks have made the move (or are in the process of doing so) from the over-the-counter exchange to more reputable U.S. exchanges, such as the NYSE and Nasdaq.
- Stood in awe as Canada became the first industrialized country in the world to legalize adult-use cannabis.
- Watched as Constellation Brands took a $3.8 billion equity stake in Canopy Growth Corporation.
Now we can add another historical marijuana moment to the list: the largest cannabis debut in history.
Curaleaf makes history on its first day of trading
On Monday, Oct. 29, Massachusetts-based Curaleaf Holdings (CURLF -1.63%) debuted on the Canadian Securities Exchange (CSE) under the ticker symbol "CURA" as well as on the over-the-counter exchange under "LDVTF." Having raised a whopping $400 million in the company's oversubscribed offering, Curaleaf debuted with a market cap of... drumroll... $4.5 billion! This was more than double the debuts of MedMen Enterprises and The Green Organic Dutchman, which previously had the largest respective market caps following their initial trading in Canada.
As has become somewhat common in the marijuana industry, Curaleaf's debut wasn't a traditional initial public offering (IPO). Rather, it debuted on the CSE via a reverse merger with Lead Ventures. A reverse merger involves a private company purchasing a publicly traded company (typically a shell company with little or no operations). This allows the private company to bypass the lengthy process of going public and gives it quicker access to capital via publicly traded markets.
What's more, since U.S.-based marijuana companies aren't allowed to list on reputable domestic exchanges, and Canadian-based pot stocks can't list on the Toronto Stock Exchange, these companies have been looking cross-border to list their shares. Curaleaf is simply one of a long line of U.S. pot companies to list on the CSE for public and institutional exposure.
What's the buzz all about with Curaleaf Holdings?
The reason Curaleaf is commanding such a huge valuation is the company's perceived footprint in the United States. It currently has 28 branded dispensaries in a dozen U.S. states, along with 12 cultivation facilities and nine processing sites. That's bigger than MedMen Enterprises' existing footprint of 14 open stores, and it could still be larger, even after MedMen's ongoing acquisition of privately held PharmaCann for $682 million.
If legal, the U.S. cannabis market would run circles around Canada. California, the fifth-largest economy in the world by GDP, has the potential to generate more in annual sales than all of Canada -- and that includes Canada's ability to export medical weed. Presumably, retailers that can build loyalty with consumers, as well as successfully enter these key markets (think California, Colorado, Florida, and perhaps New York), should succeed and generate healthy long-term profits.
Furthermore, since the U.S. federal government has retained its restrictive Schedule I classification on marijuana, interstate transport isn't legal. Thus, any retail operations have to purchase weed within that state. By operating a dozen grow sites and nine processing facilities, Curaleaf Holdings has created a vertically integrated operation that should keep costs down.
Said Joseph Lusardi, CEO of Curaleaf:
Listing on the Canadian Securities Exchange is a critical step in our growth trajectory. We are excited to make our mark within cannabis financing history through the overwhelming support of over 100 institutions internationally. We remain committed to growing our business through aggressive organic growth and the strategic deployment of capital into accretive acquisitions that extend our brand into the most attractive U.S. markets.
Though there's clearly been a lot of interest in Curaleaf, as evidenced by its $4.5 billion valuation, buyers of this stock appear to be taking on substantial amounts of risk.
Taking a peek at the company's prospectus, it generated $23.7 million in sales during the first half of the year, which is more than it had in sales all of last year. Unfortunately, the company still lost $9.8 million over six months, which is a common theme for pot stocks. With Curaleaf busy expanding its existing network of dispensaries, as well as eager to make acquisitions, it's unlikely that it turns a profit anytime soon.
Rival MedMen Enterprises reported its fourth-quarter operating results last week, and while it did generate $39.8 million in annual sales, a nearly 1,400% improvement over the prior year, its full-year operating loss ballooned to $112.3 million, if a handful of one-time items are excluded. Opening new locations and making acquisitions cost a pretty penny, which ensures these companies won't be delivering the green for some time.
Let's not also forget that these dispensary operators are going to be contending with an entrenched black market in the United States. Illicit producers don't have to pay excise taxes, federal income tax, or license fees to grow and sell cannabis. This gives the black market a clear path to undercut legal channels, which are, in some cases, taxed to the hilt (looking at you, California). Ultimately, it might mean a smaller legal market opportunity than some investors realize.
Long story short, the valuation on Curaleaf, even if it is the clear leader in dispensary presence in the U.S., looks ludicrous. Caveat emptor, folks.