Like all growth stocks, cannabis stocks had a brutal 2022. With no hope of U.S. federal legalization in the near future, cannabis stock investors will have to wait a little longer to reap the benefits. However, you cannot deny that some cannabis stocks have the potential to grow into larger and stronger companies in the long run. After all, every growth stock began small.
A smart buy is a stock that is trading at a discount and has strong fundamentals, rising revenue, and a clear path to outstanding growth. Though the cannabis industry is facing some market turbulences now, if the industry continues expanding, many cannabis stocks could have a bright future. Let's take a closer look at one such stock.
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Transitioning to be a cannabis powerhouse
Most of the domestic players have established a good presence in the U.S. cannabis market by expanding into most legal markets with a solid business model.
However, Massachusetts-based Curaleaf Holdings (CURLF -0.99%) tops the list with $1.2 billion in revenue in 2021. In the last two years, it has made some timely and strategic acquisitions that have paid off. Cannabis operators and brands such as Select, Curaleaf NJ, Blue Kudu, Remedy, and Grassroots are among those that have been acquired.
Curaleaf also targeted limited-license markets to drive revenue. Since cannabis is federally illegal, state regulators carefully select the companies they grant cannabis licenses. This has allowed Curaleaf to attract a loyal customer base in these key states.
The benefits of these strategies are evident from its recent third-quarter results. Curaleaf's revenue grew 7% year over year to $340 million in Q3. Curaleaf isn't profitable yet but has consistently reported profits from an operational standpoint. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $84 million in Q3, a jump of 18% over the prior-year period. It reduced its net loss from $54 million to $51 million in the recent quarter due to rising revenues. Curaleaf is working on achieving profitability by closing down underperforming facilities and saving costs.
The company opened two new stores in Q3, and six more stores in its fourth quarter, bringing its total to 142 stores nationwide.
For the first nine months ended September 2022, the company generated $986 million in revenue. Curaleaf also generated an operating cash flow of $71 million in the first nine months of 2022.
New cannabis markets could be beneficial
Curaleaf's management expects five more states to legalize adult-use cannabis in 2023 and is excited about these markets. The company believes its strong presence in Maryland and North Dakota could be rewarding. Maryland legalized recreational cannabis in November 2022. However, no decision has been made regarding when retail sales will begin. There is progress in legalization efforts in North Dakota as well. Curaleaf operates four medical marijuana dispensaries in each of these states.
Curaleaf also thinks the Connecticut and New York cannabis markets combined could be a $5 billion to $6 billion opportunity.
CURLF EBITDA (Quarterly) data by YCharts
Patience could be highly rewarding with this stock!
Despite operating in a highly competitive market, Curaleaf has grown its revenue and EBITDA consistently every quarter. Note that this growth is from a limited legal U.S. market.
The company will benefit as more and more states legalize cannabis. Curaleaf also has a tremendous scope in the European cannabis market, where it operates as Curaleaf International. The global cannabis market could grow at a compound annual growth rate (CAGR) of 14% to be worth more than $70 million by 2030. Curaleaf is well-positioned to take advantage of this burgeoning market.
Wall Street analysts recommend Curaleaf stock as a strong buy, with a 101% upside potential. Wall Street's optimism stems from the fact that Curaleaf is growing its top line, reducing losses, and expanding in a highly competitive market.
Curaleaf's stock is cheap now, trading at a price-to-sales ratio of 2 -- making it the right time to buy and hold this growth stock for the long haul. But note that cannabis stocks are good for investors with a high risk tolerance. Hence a small investment would be wise, to begin with. Investors can also mitigate risk further by diversifying their portfolio with some stable stocks from different industries.
