Times are hard for American cannabis businesses like Curaleaf (CURLF +1.25%). Thanks to the bear market and the end of the marijuana market's "gold rush era," its shares fell by more than 50% in the last 12 months. But considering that the industry-tracking AdvisorShares Pure U.S. Cannabis ETF crashed by an even more ghastly 70%, there's reason to believe that the market's expectations for Curaleaf are a bit higher than for the industry itself.
Is this stock on its way to a rebound in 2023, and if it is, should investors buy it? Let's take a sober look at its state of affairs to find out.
OTC: CURLF
Key Data Points
The near-term outlook isn't great
There are a few upcoming headwinds that'll put more pressure on the company's top line, which totaled $340 million in Q3 of 2022 and grew by 7% year-over-year. The most dangerous headwind for investors is that much of the U.S. adult-use cannabis market is becoming increasingly saturated by marijuana products that are being sold from ubiquitous and largely interchangeable dispensaries. That's driving selling prices down, as supply is higher than demand for products. At the same time, no individual retailer appears to have any kind of competitive advantage that would bring customers back and protect a company's market share. Of course, the state of the market isn't Curaleaf's fault, but it's a fact of life which will likely lead to compressed margins and perhaps even a contracting base of revenue for a year or so.
The second headwind is that, per management, Curaleaf's pace of building new stores is likely to fall precipitously in 2023, as its U.S. footprint is approaching its target size. One implication of this development is that further revenue growth will need to come from other sources, like finding fresh ways to juice same-store sales or by developing new and sought-after cannabis products. Another implication is that the fight for state-level market share will now begin with gusto, and without clearly dominant brand power or a unique retail experience, the company doesn't have any reliable way to retain its customers. And both of those implications suggest that bringing in more sales year-over-year will be more expensive than it was in the past.
Finally, inflation is a potential headwind as well. As the Federal Reserve will likely keep hiking interest rates in 2023, investors are less likely to favor growth-stage businesses like Curaleaf, as they face higher borrowing costs and must also deliver higher returns for their higher-than-average level of risk. Similarly, there's a solid chance that consumers will cut their purchases of marijuana if inflation continues to sting their finances.
It's not all bad
Despite these headwinds, there are also a couple of revenue tailwinds that will soon be in play, potentially offsetting the bearish outlook. The biggest of these tailwinds is Curaleaf's entry into the Connecticut adult-use market as of Jan. 10, fresh on the heels of its marijuana legalization legislation going into force. In total, the Connecticut adult-use market is anticipated to be worth around upwards of $215 million in the first year of operation. Curaleaf's slice will be considerably smaller, but it'll still help to buoy the top line.
The second tailwind is that the business' retail footprint in Florida just expanded, and that'll generate more sales too. It already has 55 dispensaries in the state, but it also recently opened new stores in Tallahassee and Palm Beach Gardens, both of which will serve the medicinal market. Those new openings are doubtlessly part of the reason why Wall Street analysts on average expect the company to report revenue just over $1.5 billion in FY 2023, up from their estimate of $1.3 billion for 2022.
What's the right play?
2023 probably won't be a great year for Curaleaf shareholders, and it's possible that the business will eventually be forced to close some of its unprofitable stores. Don't expect it to make much progress toward profitability. Nonetheless, if you're the kind of investor who can tolerate high risk, this stock could be a dominant player in the U.S. marijuana market within the next three years if it can find a way to build some brand loyalty and protect its state-level market shares while surviving the cannabis glut.
For most investors, it's better to stay on the sidelines for now. The long-term thesis for investing in Curaleaf remains unproven, though there might be a bit more evidence of its staying power to reconsider a purchase in a year or so.
