Cowen analyst Vivian Azer thinks the legal cannabis industry’s sales in 2022 will grow 6%, instead of the 13% growth she previously forecast.
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Next week, America’s licensed cannabis operations will start reporting June quarter sales. The numbers might contain some disappointments.
In a Monday note, Cowen analyst Vivian Azer reduced her forecast for marijuana industry sales for the first time, citing headwinds to weed consumer spending.
Cannabis customers are mostly in the lower-income brackets, and those are the Americans the economy is pinching. Pinched buyers, says Azer, might turn to the cheaper wares of the illicit market.
“The challenges facing the consumer are generally well understood as higher gas prices and broader inflation have weighed on consumer discretionary spending,” writes Azer. “[I]t’s still a category that has ample competition from the lower-priced illicit market.”
Other restraints on the industry’s year-over-year growth include tough comparisons with last year’s lockdown-puffed sales and deflating cannabis prices, Azer writes. Barron’s wasn’t able to reach Azer to discuss her report.
Azer now thinks the legal cannabis industry’s sales in 2022 will grow 6%, to $26.4 billion, instead of the 13% growth that she previously forecast. She has reined in her long term forecast, too. Legal sales in 2027 will total $45.6 billion, Azer projects, instead of her previous forecast of around $49.5 billion.
Unlike their Canadian counterparts, the “Multi-State Operators” in the U.S. delivered sparkling growth in recent years. The American MSOs grew aggregate sales at a 90% annual rate over the last five years, says Azer, and 30% in 2021.
A few firms have continued to grow as expected, including Trulieve Cannabis (ticker: TCNNF) and Green Thumb Industries (GTBIF), but sales and earnings disappointments began appearing across the industry in the latter half of 2021. That began weighing on the American operators’ stocks—which only trade over the counter in the U.S. because marijuana is illegal under federal law.
The failure of cannabis reforms to make it through Congress have been the biggest weight on the MSO stocks, says Azer. An exchange-traded fund that tracks the group, the AdvisorShares Pure US Cannabis ETF (MSOS), has lost three-fourths of its value since it peaked in February 2021—trading Monday at $11.86. She sees federal reform as unlikely this year, and uncertain in 2023.
Azer’s concern with economic headwinds echo what Barron’s heard last week from Trulieve chief executive Kim Rivers—who was in Manhattan for an industry conference.
“Were all trying to figure out consumer preferences, in light of the economic backdrop,” said Rivers. In states like Pennsylvania, Trulieve has seen its sales mix shift toward value products.
While Cowen is tempering its expectations for the industry’s organic growth, analyst Azer still foresees expansion opportunities from mergers and from the launch of recreational sales in states like New York.
She has buy recommendations on Trulieve and Green Thumb, as well as Curaleaf Holdings (CURLF), Cresco Labs (CRLBF), Columbia Care (CCHWF), and TerrAscend (TRSSF)—with price targets that would represent fivefold gains from most of their recent prices.
Write to Bill Alpert at william.alpert@barrons.com
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