For years, we have been highlighting the growth of the US cannabis market and continue to view it as a more attractive investment opportunity when compared to the Canadian market.
During the last year, US cannabis operators have reported explosive growth, and this has caught the attention of several large scale Canadian Licensed Producers (LPs). In an attempt to remain relevant in an industry that is rapidly advancing, several Canadian LPs have acquired strategic US assets to have leverage to the market once Federal legislation changes.
Companies like Canopy Growth Corp. (WEED.TO) and Aphria, Inc. (APHA.TO) (APHA) own strategic US assets that will allow for the operators to capitalize on the market as soon as regulations change. Tilray Inc. (TLRY) also has leverage to the US market via its planned mega-merger with Aphria.
We believe that the Canadian cannabis companies that are unable to create a presence in the U.S. are going to face long-term challenges and we want our readers to be aware of our thesis. Based on data from Statistica Canada, Cowen and Company, Bank of America, Stifel, BMO, Leafly, Business Insider and Sammy J Estimates, the US cannabis market greatly outperformed the Canadian cannabis market, and this is a trend that we expect to become more pronounced.
Based on the data from these firms, analysts determined that US multi-state-operators (MSOs) will trade at a 6x multiple for enterprise value/revenues in 2022. This is substantially lower than the multiple that was determined for Canadian LPs. According to the data, Canadian LPs are expected to trade at a 13x multiple for enterprise value/revenues in 2022.
When you analyze the projected 2022 enterprise value/EBITDA for US MSOs and Canadian LPs, the differential is significant. In 2022, US MSOs are expected to trade at 17x multiple while Canadian LPs are expected to trade at 83x multiple. We believe these metrics cannot be ignored and have a higher conviction level in the US cannabis industry over the long-term.
One of the most interesting pieces of data that we have come across when comparing the US and the Canadian cannabis industries is related to the market capitalizations of the 5 largest operators in each region. The 5 largest MSOs have a combined market capitalization that is similar to the combined market capitalizations of the 5 largest Canadian LPs. We expect to see the US market to exceed the size of the US cannabis market in 2021 and expect US operators to see multiple expansion when cannabis is legalized at the federal level.
Once cannabis is legalized in the US, we expect large MSOs take a look at the opportunity in the European Union (EU). Currently, Canadian LPs have been the main beneficiary of the growth of the EU cannabis market, and we expect this to change once the laws change in the US.
If you are interested in learning about the Canadian companies that are focused on the US market, please send an email to email@example.com with the subject “LPs that are Levered to the US Cannabis Market” to be added to our distribution list.