Marijuana stocks, on balance, had a forgettable 2022. Growth investors largely shied away from the industry in response to sky-high inflation and soaring interest rates.
Making matters worse, early growing pains for the industry, such as oversupply, a stubbornly persistent black market, and ill-advised capital management moves, continued to weigh on companies' top and bottom lines in 2022. The net result is that most publicly traded marijuana equities took a sizable haircut last year.
The top multi-state operator (MSO) Curaleaf (CURLF), for instance, lost an eye-popping 52% of its value in 2022. Is this substantial pullback a buying opportunity, or should investors remain on the sidelines as the industry works through these various headwinds? Below is a bullish versus bearish take on Curaleaf's near-term prospects.
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This MSO could be deeply undervalued
George Budwell: Admittedly, marijuana stocks are in a tough spot. Economic pressures have slowed demand in states where pot is legal. Moreover, a supply glut has weighed heavily on profit margins for most legal cannabis cultivators over the last 12 months.
The push to legalize marijuana at the Federal level in the U.S. has also turned into a slog, with some key voices within the movement recently acknowledging that full-scale legalization might be no less than three years away.
Against this dire backdrop, it might seem like a bad idea to start building a position in any publicly traded marijuana stock right now. But there is a compelling counterargument to be made for accumulating some select pot equities in this downbeat environment.
The elite MSO company Curaleaf is a case in point. With a coast-to-coast commercial presence in 22 states and a burgeoning European operation via its EMMAC Life Sciences acquisition in 2021, Curaleaf stands to benefit enormously from the growing global demand for cannabis over the course of the current decade. Wall Street, in fact, thinks this top MSO play could appreciate by as much as 525% by 2024.
Wall Street's optimism stems from the company's solid fundamentals (relative to its closest competitors), growing top line, and fairly resilient gross profit margin (49% at last count). The bottom line is that Curaleaf is succeeding as a business, whereas a healthy chunk of its competitors are struggling to simply stay afloat.
Dilution could burn investors
Keith Noonan: The last year has been tough for marijuana stocks. High levels of inflation and rising interest rates have generally depressed equity valuations, and pot stocks have also been pressured by political shifts and other unfavorable industry developments.
Investors have been hoping for a move closer to legalization on the federal level, but Republican control in the House of Representatives seems to make that less likely in the near term. While cannabis stocks, and Curaleaf in particular, could see a significant positive catalyst if the SAFE Banking Act were to be passed and enable banks to deal with marijuana-related companies, that also seems unlikely with a Republican-controlled House.
While Curaleaf's revenue inched up just 1% year over year in the third quarter to reach $339.7 million, its net loss for the period expanded roughly 82% to $51.5 million. With $198 million in cash and $599 million in outstanding debt, Curaleaf may need to sell new stock or secure new loans in the not-too-distant future.
CURLF Shares Outstanding data by YCharts
Curaleaf has increased its shares outstanding roughly 36% over the last three years alone, and the company may continue to lean heavy on new share offerings in order to raise funds for its operations.
While Curaleaf has an established position in the MSO cannabis space, it also still runs the risk of being pressured by competition and commodification trends. Production glut and retail saturation have already been making it difficult for individual operators in Canada's legal marijuana industry, and the same issues could play out in the U.S. market.
Curaleaf may still go on to be a long-term winner, but the company's risk profile and near-term business challenges suggest the stock could continue to see turbulent trading.
