Waiting in Vain
The Bengal Bite
The twists and turns of the cannabis industry are enough to give an observer whiplash. While all the news of late is about what’s going on in DC - let’s take a walk down memory lane and put things in perspective.
Cannabis businesses have always seemed to be valued on some “new metric” that the industry adopts as the end all barometer of progress. Here are some prior examples:
Metric: as the Canadian players tried to differentiate themselves, it was all about “funded capacity.”
Consequence: How fast can you say overcapacity and disappointment...
Metric: In the early years of the large scale legal cannabis industry the market valued potential TAM and license acquisition at all costs was the name of the game.
Consequence: Companies grew at all costs but couldn’t get the capital to finance their plans. Efficiencies of scale were very tough to obtain given the patchwork nature of the regulatory environment. Some companies basically gamed the system by buying a small asset in a large state to be able to raise its TAM - as if one dispensary in California now allowed you to claim an additional 40 million people in your addressable market.
TAM was too theoretical though, which leads us to....
Metric: Revenue growth of a platform was the new name of the game. Showing you had the assets and the ability to turn them on was what mattered.
Consequence: Slower than predicted state program rollouts (Massachusetts, California, etc.) dinged projections as investors were disappointed with companies not reaching their numbers as quickly as had been promised. When companies did show revenues it was often low quality and at terrible margins. Again, some companies saw what the public markets were valuing and gave it to them by doing M&A with the express goal of raising their revenues - margins be damned.
Predictably, a cash crunch ensued and investors demanded EBITDA...
Metric: Growth with operating leverage and EBITDA are... the new name of the game.
Consequence: Positive EBITDA and growth have been achieved by the bigger MSOs (record setting quarters by all the big boys as well as a strong vision into growth into 2022).
So, the largest US cannabis companies are largely doing exactly what they said they would do: accelerating growth and profitability in their markets. But, suddenly that is no longer enough. The market is now saying it wants federal legislation and nothing else matters. The group of investors that take positions in US cannabis has not grown all that much in the last few years - so the same people demanding federal legalization as the lynchpin of “real” value in cannabis companies are largely the same investors who just a short time ago would have been satisfied politically with just the Cole Memo being reinstated.
So now federal legislation is finally proposed...and depending on who you ask it's either “too nebulous” (what happens with interstate commerce, FDA participation, etc.) or “too specific” (proposed tax rates). Again, take stock of where we are just a few short years from the Cole Memo being rescinded: the senate majority leader has proposed legalizing cannabis in at least some form.
There is no silver bullet that will solve the myriad of complexity with the cannabis markets overnight. However, iterative changes need to be viewed as positive even if they don’t get us “all the way.” Perfect cannot be the enemy of good. Throughout the drama that has ensued from all the storylines above - the following bullet points are the foundation of why we remain unabashedly bullish on the sector:
- True leadership from several high nine-figure a year revenue businesses that have the financial (and likely political) heft to fight the incumbent powers that have battled against cannabis
- Proven business models and much more accurate revenue forecasting than in the past - the differences in financial performance between early Canadian companies and large US MSOs is impossible to ignore at this point
- An ever-increasing number of states launching medical and adult-use programs
- Proven tax base that we think will be impossible to simply “take away” from cash-starved states
Progress will not be denied. We believe in staying the course, selectively, because, despite the noise on the surface, the underlying industry is as strong as it’s ever been. Our views are summed up by this little meme that we made:
Lessons from the California Edibles Market - Brands in Cannabis, Part III
from the bengal bite
As we discussed in our last Bengal Blog post, California retail sales data suggests that consumers are not particularly brand loyal when it comes to cannabis flower and concentrates, instead preferring to try out many different products across different brands. The edibles market in California seemingly is behaving, unlike these other categories.