It's been a tough year for marijuana investors, especially those who own Jushi Holdings (JUSHF -3.92%). The multistate operator's (MSO) stock has lost 41% of its value over the last 12 months, and shares are down more than 60% from the all-time high hit back in March.
Even though Jushi is doubling sales and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), the market has dramatically discounted all the good news. This is pretty much in line with how it's treating the cannabis industry as a whole as represented by the Horizons Marijuana Life Sciences ETF, which is down by a similar amount.
Image source: Getty Images.
It seems a lot of the reason cannabis stocks are down is that the momentum for the legalization of marijuana at the federal level has dissipated. Investors who were high on the prospects of seeing a bill make it through the U.S. Congress have lost hope it will happen anytime soon.
CEO David Klein of Canadian-based marijuana producer Canopy Growth was so amped by Democrats winning control of the U.S. Senate (technically a 50-50 split, but a Democrat vice president provides the necessary swing vote) he predicted Canopy would enter the U.S. marijuana market this year. That's not happening.
And for Jushi Holdings and many other producers, distributors, and retailers, that's not even necessary for them to succeed. So let's see if this badly beaten-down MSO is a buy at this price, or if continued pessimism about marijuana legalization will continue to irrationally weigh on the stock.
Image source: Getty Images.
Growth that comes at a price
Third-quarter revenue jumped 116% from last year to $54 million in Q3 2021, while adjusted EBITDA of $6.4 million was 129% higher year over year as Jushi has expanded to 26 operating dispensaries in a half-dozen states (as well as a handful of stores in Nevada it will be operating following the acquisition of NuLeaf that it expects to close on in early 2022).
About 80% of Jushi's sales are coming from online sources, with an average cart size of $122. It also reported two days in October and one in November when it saw $1 million in online sales. Jushi notes its conversion rates approach nearly 14%, which is well above the 3% industry benchmarks for e-commerce.
Yet Jushi continued to lower its guidance as the year progresses. Full-year revenue is now forecast to be around $210 million at the midpoint of its guidance range, down from $225 million at the end of the second quarter and $230 million earlier in the year.
Adjusted EBITDA guidance has been similarly lowered, now down to $21 million to $25 million, or half of what it anticipated back in the first quarter.
Image source: Getty Images.
Targeting limited-license states
What Jushi's business model is counting on, and why it is targeting the states that it does, is that they limit the number of licenses that are permitted among a select number of operators. Pennsylvania is currently Jushi's biggest market, where it has 16 retail locations opened, but Illinois, Virginia, and Massachusetts have been other primary target states. In all, it has the potential to open as many as 18 additional locations with the number of licenses it has been awarded.
Now there is a risk with Jushi's current concentration in Pennsylvania, which accounts for 61% of its total retail stores, particularly after the state ordered a review of vaporized medical cannabis products. But while that is a growing segment, it is still relatively new, and dried flower is still the main product sold.
Because it will have reached its maximum license limit in the Keystone State by the end of 2021, Jushi will now be looking to states like Virginia, Illinois, and Massachusetts for its next phase of growth.
Image source: Getty Images.
Next phase of growth
Certainly, federal legalization would help Jushi and other cannabis companies by reducing some of the inefficiencies present in the patchwork quilt of state laws, but it's not a necessity. Virginia is a still a state new to legalization, but has exceptionally promising prospects.
Flower sales, for example, were added to the state's medical marijuana program in September, and its market is tightly controlled with only 30 licenses allowed. Jushi has two operational dispensaries now under its Beyond/Hello banner, and it plans to open four more over the next two years. Adult recreational use is expected to be permissible by 2024.
That ought to help shore up some of Jushi's flagging financials, and that in turn ought to boost its weakened stock price.
Wall Street sees business rapidly expanding and forecasts sales surging from $210 million this year to over $1.5 billion by the middle of the decade. EBITDA should swell to $406 million, which is likely why analysts have a one-year consensus price target of $5.70 per share, or some 67% above the current $3.40 per-share price.
It may be a bumpy ride, but Jushi Holdings certainly looks like a budding marijuana stock ripe for the picking.
