The seemingly never-ending bear market may be headed into hibernation after some of the big cannabis MSOs beat revenue estimates this past quarter.
“This quarter, we had more operators, not just showing stronger results, but also stronger results relative to analysts’ expectations,” Water Tower Research Analyst Jesse Redmond wrote.
Redmond noted that in previous quarters, analysts’ rosy expectations kept leading to investor disappointment. That disconnect seems to have been corrected.
“This quarter, the top 10 U.S. MSOs by market cap beat revenue expectations by 0.29% and adjusted EBITDA expectations by 6.35%,” he added. “Digging deeper, the top five operators (aka Tier 1) beat revenue by 4.66% and adjusted EBITDA by 11.98%. Meanwhile, the Tier 2s missed on revenue by 1.29% on average and beat on adjusted EBITDA by 1.66%.”
Redmond attributed the positive shift to MSOs beginning to benefit from scale, have cleaner balance sheets, and getting better at communicating to the street what expectations should be.
In 2022, the story was New Jersey. If an MSO was in that newly opened market, the numbers were golden. This year, it was all about Maryland.
The state initiated adult-use sales in July, and by the second quarter, sales had doubled. The state hit new records every month and in October tallied up $90 million in sales.
Redmond wrote that six of the top 10 MSOs by market cap beat on revenue – and five of those six were in Maryland. Drilling further, four of these five have the state limit of four dispensaries.
He highlighted that TerrAscend (OTCQX: TSNDF) may have the best assets in the state, and it beat on revenue by 7.7% and adjusted EBITDA by 41.4%. Trulieve and Green Thumb Industries both also said they benefited from being in the Maryland market.
Many companies believe they turned the corner during saw this past quarter. Expenses were cut right and left, and debt was restructured to more favorable terms with maturities pushed further into the future.
Canopy Growth Corp. (Nasdaq: CGC) said its expense reduction generated more than $200 million in savings. Similarly, Curaleaf Holdings (OTC: CURLF) said it implemented significant cost reductions and right-sized its inventory.
As companies head into the holiday season hoping for a stellar Green Wednesday, investors appear to feel better about potential positive legislation from Washington D.C. in 2024.
It is also possible that these green shoots of optimism are coming from planting some basic business seeds. Cutting costs, identifying new solid markets, and restructuring potentially debilitating debt are paying for many.
Indeed, Green Market Report wrote that TerrAscend even raised its 2023 guidance for net revenue to at least $317 million, representing year-over-year growth of 28% in net revenue from continuing operations. The company’s previous guidance was at least $305 million.
Next year’s parlor game could be guessing which new state market will steal the show in 2024.
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