The coronavirus pandemic brought chaos to most other industries, but did the opposite for the marijuana industry. Cannabis sales skyrocketed in the pandemic after the drug was deemed an "essential" product during lockdown. Sales are still on the rise this year. The U.S. cannabis companies, in particular, did exceptionally well in 2020.
Among them, Massachusetts-based Curaleaf Holdings (CURLF -5.94%) is one of my favorites. Curaleaf stands in a much better position than many of its Canadian counterparts, with its recent threefold revenue growth bringing it closer to profitability. Its market cap of $9.1 billion is getting close to that of Canopy Growth (market cap of $10.7 billion), one of the most popular Canadian cannabis players. But Canopy is still struggling to achieve positive earnings before interest, taxation, depreciation, and amortization (EBITDA).
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Even with a limited legal market in the U.S., Curaleaf has done wonders and is carving its path toward success with smart growth strategies. As more and more states legalize marijuana, let's take a look at how Curaleaf is positioned to take advantage of that and why it could be a good fit for your portfolio.
Its rising revenues are bringing it closer to profitability
Positive EBITDA, a rare occurrence for cannabis companies, reveals how well a company is handling its operating expenses. Meanwhile, net income -- or true profitability -- represents the total earnings of the company after all deductions. Very few of the Canadian pot companies have been able to achieve that, even though Canada has federally legalized both medical and recreational marijuana. The drug is still federally illegal in the U.S., but U.S. cannabis companies are closer to making profits. Curaleaf isn't profitable yet but has been consistently reporting positive EBITDA. In its fourth quarter, which ended Dec. 31, adjusted EBITDA came in at $54 million, compared with $14 million in Q4 2019.
Most of the credit can be given to its rising revenues. Its fourth-quarter total revenue surged by 205% year over year to $230 million. Its retail segment revenue soared 242% to $165 million in Q4 versus the year-ago period. Its wholesale revenue also saw a drastic jump of 578% year over year to $64.4 million.
2021 could be a "transformative year"
Curaleaf's expansion in 2020 has been very impressive. At the start of last year, it had 54 dispensaries across 17 U.S. states. By March 9, 2021, the company owned 101 stores in 23 states. It still holds 37 licenses to open additional retail stores in the U.S, with plans to set up 23 dispensaries in 2021 to strengthen its national footprint. And on April 8, it opened two more retail stores in Pennsylvania.
Pennsylvania could be a key market for Curaleaf. Peer Green Thumb has already solidified its position in the state, where it saw impressive medical cannabis revenue growth in its Q4 ended Dec. 31. Recreational cannabis legalization is in the works in Pennsylvania. Making a mark in the medical cannabis market there will help Curaleaf succeed when the state legalizes adult-use cannabis.
Its aggressive growth strategies last year also included wise and timely acquisitions that have brought in outstanding revenue numbers. Its acquisition of hemp cannabidiol (CBD) company Grassroots, which closed in July 2020, helped it gain 135 dispensary licenses with 1.6 million square feet of cultivation capacity. In 2020, it also completed acquisitions of various other cannabis products manufacturers and dispensaries including Select, Curaleaf NJ, Arrow, MEOT, Remedy, Blue Kudu, and Alternative Therapies Group.
Curaleaf's management thinks 2021 could be a "transformative year," which I believe too. These acquisitions could start to show their full potential this year, driving in more revenue for the company. Management hopes its recently acquired Select brand, which is now available in 1,700 retail outlets, could make it to 2,000 by the second quarter of 2021.
A new leadership team could be beneficial
Curaleaf ended its fourth quarter with $73.5 million of cash on hand and $291.5 million of outstanding debt, net of unamortized debt/bond discounts, which is the difference between the face value of a bond and the amount actually paid for it by investors. That's a lot of debt, but at the rate the company is growing its revenue and EBITDA and moving closer to profitability, it will be able to clear off its debts soon. Besides, most of its debts involve financing, which Curaleaf uses in acquisitions and expansion initiatives that could boost its revenues further.
Curaleaf's new CEO, Joseph Bayern, believes the U.S. cannabis industry could "grow to $75 billion or $100 billion in size over the next decade." He is certain that the company, with "its differentiated and innovative products," will take advantage of this evolving market. I agree! Its strong balance sheet and smart acquisitions have put Curaleaf in a great position as state legalization gathers steam. There is no certain timeline yet for U.S. federal legalization, but Democratic control of the White House gives hopes of that happening in a couple of years.
If its expansion continues at this pace, it wouldn't be long before Curaleaf starts making profits and leading the U.S. cannabis industry. Bayern was the company's president until the end of last year. Every CEO has a unique style of running a company. It will be interesting to watch how Curaleaf expands this year under his leadership while keeping its balance sheet stable. We will know more about its plans for this year when it reports its first-quarter fiscal 2021 results on May 10.
