Curaleaf - Bull/Bear Scenario Analysis & Investment Thesis
Updated: Jul 7, 2022
This page presents the Curaleaf investment thesis with bull and bear scenario analysis of future revenue, market cap and share price. The page uses the format and thoughts presented in the Cannabis Portfolio page, with following sections:
Overview and investment thesis
Overview and investment thesis
The following is the official description on the website for Curaleaf:
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Headquartered in Wakefield, Massachusetts, Curaleaf has a presence in 22 states, and owns and operates 134 dispensaries and 26 cultivation sites with a focus on highly populated states including Arizona, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania.
An important step as you DYODD in any company is to review the company’s Investor Presentation and financial results. For Curaleaf, these are available in their Investor Relations page and their Financial Results page.
I would highly recommend downloading the latest Investor Presentation and studying it. There is a lot of information but it will give you an overview of their strategy, brands, performance and investment thesis. I will not repeat the content, but will mention some key points and insights.
Curaleaf has been categorized in my fruits analogy as an aprium, because it is vertically integrated with retail dispensaries, as well as cannabis cultivation and processing facilities. It is currently a gladiator in the dog-eat-dog OTC exchange (Colosseum).
The company operates in 22 states in the US, and also has operations in the UK and Europe. It has well over a hundred dispensaries located across the US, 26 cultivation sites and an established wholesale model with a strong distribution network. It is the company with the largest dispensary count, second only to Trulieve. They have several branded products which they distribute through their branded retail and wholesale channels.
Vertical integration through retail dispensaries, distribution, cultivation and processing, is the source of Curaleaf's competitive advantage that few can compete with. The company is one of the highest ranked companies in terms of Revenue Growth Analysis. It is one of the select few companies to be awarded the full 15 points for Revenue Growth in the Best Cannabis Stocks Analysis, having delivered an average quarterly revenue growth in excess of 15% for the decade that started in Q1 2020. During this decade the company has also delivered positive AEBITDA in every quarter. It was hence awarded the full 15 points for the AEBITDA category in the Best Cannabis Stocks Analysis.
Curaleaf is also a top holding of the largest Cannabis ETF, the AdvisorShares Pure US Cannabis ETF (Ticker MSOS). As analyzed in the MSOS ETF Analysis, it has one of the top three highest weighting in the ETF at the time of launch of this blog (June 2022). This will be beneficial to the share price when the cannabis sector gets back in favor and funds flow into cannabis stocks and ETFs (i.e. sector rotation).
Bull and bear scenario analysis using 5% quarter over quarter (QoQ) revenue growth and 10% annual share dilution
The base case scenarios for Curaleaf are built on the assumption that quarter over quarter (QoQ) revenue growth will be 5% and annual dilution of shares will be 10%. The table below shows the quarterly revenues for the decade starting Q1 2020, and future revenues forecasted with 5% sequential revenue growth.
All tables on this page will be updated frequently. Review the past performance in revenue growth, the average for past quarters and the Decade to Date (DTD) % Growth in revenue. These were incorporated in the Best Cannabis Stocks Analysis. The table with comparisons to other analyzed cannabis stocks is presented in the Revenue Growth Analysis page. The table shows an impressive 15%+ average quarterly growth in revenue and a DTD growth of around 300%.
This now leads to what I call the Adastra charts for the base case Bull and Bear scenarios. The Bull Market Scenarios are presented in the table below.
All the scenario analyses presented here are built on the thesis that the rising tide of cannabis will be not one but two waves – the revenue growth wave and the bull market valuation wave. These tables predict the potential market cap and share price for the combined effect of these two waves, which can magnify the potential gains in share price appreciation.
This Bull market scenario analysis factors in 5% quarter over quarter (QoQ) revenue growth and 10% annual share dilution. Based on previous performance and the execution of the strategy demonstrated, I’d assess that there is a good probability that the revenue growth is achievable.
Nobody can predict when the next bull market will happen. But the numbers are modelled out to 2025, and if we see bull market valuations in these years, the market cap and price targets will be driven by the PS valuations given by the market. The numbers show that if we see any of the Bull Market PS valuations (Moon 10 PS, Mars 15 PS, Stars 20 PS), impressive gains can be had.
Will this company survive (with limited share dilution) till the next cannabis bull market?
With the base case scenario (5% quarterly growth at 10% annual share dilution) achievable, there is a good probability that Curaleaf will survive till the next bull market. The probability of survival increases when we see the numbers in the AEBITDA Analysis. The numbers show that in spite of the phenomenal growth achieved, the company has reported positive AEBITDA in 100% of the quarters this decade. This is a well run company that combines revenue growth with cost optimization.
In the Cannabis Portfolio page I mention macro factors to consider like inflation, and consumers switching to cheaper substitutes and white label brands. Many companies might see sales decrease with inflation impacting consumer behavior. Curaleaf’s vertically integrated business model, with retail dispensaries, distribution, cultivation and processing, and owned brands, sets it up for success during challenging market conditions. The ecosystem is backed by economies of scale. The competition, mostly smaller businesses, lack these strengths and many are likely going to fail.
In the INVESTING category’s Cannabis Investing 1: Investment Opportunity of the Century? article, I estimate that the US cannabis market will grow from current US$30 billion to US$50 billion or more in 2025. Given the growth prospects for the cannabis market, the revenues forecasted in the tables above can be achieved if Curaleaf continues to grow with only a third of the Quarter over Quarter revenue growth they have delivered in the decade starting Q1 2020. The revenue projections seem conservative and achievable through a combination of organic growth and growth through acquisitions. Should there be a bull market in the future years, with bull market valuations, the market price and share prices projected are achievable.
While the long term prospects for the cannabis sector are bright, in the short term there is a risk that the sector will remain out of favor and that valuations can remain low or even deteriorate further. It is important to model out Bear market scenarios based on Bear Market PS valuations (Koala Bear 2 PS, Panda Bear 1 PS, Polar Bear 0.5 PS). These Bear Market Scenarios are presented in the table below.
Curaleaf’s ridiculously low PS Ratio given strong revenue growth and AEBITDA results indicate that there may be limited downside potential to the share price. The only justification for lower PS valuation would be a risk of bankruptcy. I never assign 100% probability to any scenario in the cannabis sector. But based on all that I know about the company, I would assess the bankruptcy risk as low.
Nevertheless, the Bear Market scenarios are worth reviewing to project market cap and share price for lower PS valuations.
Optimistic bull and bear scenario analysis using 10% quarter over quarter (QoQ) revenue growth and 20% annual share dilution
Now let’s look at some optimistic scenarios and assess feasibility for these scenarios. The optimistic case scenarios for Curaleaf are built on the assumption that quarter over quarter (QoQ) revenue growth will be 10% and annual dilution of shares will be 20%. The table below shows the quarterly revenues for the decade starting Q1 2020, and future revenues forecasted with 10% sequential revenue growth.
Review once again the past performance in revenue growth, the average for past quarters and the Decade to Date (DTD) % Growth in revenue.
This now leads to the Adastra charts for the optimistic case Bull and Bear scenarios. The Bull Market Scenarios are presented in the table below.
At first glance, the revenue growth numbers seem too good to be true. The 2025 revenue projection in the optimistic scenario (10% quarterly revenue growth) is around US$ 5 Billion. The company has delivered an average quarter over quarter growth of 15%+ for this decade. But that was during the early phases of the growth in the cannabis market. To deliver the lower but still impressive sequential revenue growth of 10%, the company would need to capture a significant percentage of the US cannabis market.
If the 2025 US cannabis market is at US$ 50+ Billion, Curaleaf would need 10% of the market share to reach annual revenue of around US$5 Billion. Across multiple sectors we have seen that the initial years (or decades) in a new (or transforming) industry leads to consolidation, with smaller operators either closing or being bought out by larger companies. We saw this in the tobacco and alcohol industries post prohibition of alcohol (1933). In the INVESTING category’s Cannabis Investing 1: Investment Opportunity of the Century? article, I listed 5 alcoholic beverage companies that had a combined market cap of well over US$300 Billion. We also saw this consolidation with the rise of retail giants like Walmart and Costco. The cannabis sector too could see such consolidation.
With the growth in the cannabis market and Curaleaf's continued growth through organic means and acquisitions, the revenue projections in the optimistic scenarios seem feasible. There is much uncertainty however as we would need more states to legalize and we would need to see the legal market capture more market share from the illicit market.
This brings us to the question:
Will this company thrive when legislation allows uplisting, institutional ownership and Nasdaq/NYSE listed companies to sell THC products in the US?
If legislation is passed that allows OTC listed US Cannabis companies to uplist to Nasdaq/NYSE and institutional investors to invest in the sector, companies like Curaleaf will benefit tremendously. In the INVESTING category’s Cannabis Investing 5: When Moon, Mars and Stars? article, I elaborate on the potential impacts of institutional investors finally getting to invest in fundamentally strong gladiators like Curaleaf, who are trading at ridiculously low valuations on the dog-eat-dog OTC exchange (Colosseum). The real and sustainable gains in market cap and share price might only be achieved when the institutions invest their funds in the sector and bring in sector rotation. This can trigger a bull market and with it the bull market valuations shown in the table above. The optimistic case, however far fetched the numbers may seem, is mathematically feasible post uplisting to Nasdaq/NYSE along with institutional participation.
In the optimistic scenario also, in the short term there is a risk that the sector will remain out of favor and that valuations can remain low or even deteriorate further. It is important to model out Bear market scenarios based on Bear Market PS valuations (Koala Bear 2 PS, Panda Bear 1 PS, Polar Bear 0.5 PS). These Bear Market Scenarios are presented in the table below.
Additional Thoughts
In this section I will share some additional thoughts of mine, designed to provoke further thought and due diligence in readers.
One of the key differentiating factors for Curaleaf is their commitment to Research and Development (R&D). They have R&D facilities in Massachusetts and Kentucky with a world class team of dedicated scientists. As mentioned in the Investor Presentation, they launched well over 100 new products in 2021, which are contributing nearly 20% of revenues. They have collaborations with Universities in the UK and Italy. They also have a partnership with Boiron, a global leader in Alternative Medicine (Homeopathy) based products.
The factor I am most bullish about with Curaleaf is the growing International operations. The company has seen strong growth in the UK and Europe. They are setting themselves up for success when Germany legalizes cannabis as seen with the Strategic Partnership with
Pharmaceutical and Medical Cannabis Leader, Zambon GmbH.
Curaleaf is one of the few Cannabis companies that is strategically aligned for legalization in Germany and other European countries. There is tremendous potential in Europe with Medical and Recreational cannabis. Germany in particular is a market to watch. The market size is potentially more than double Canada's with Germany having more than double Canada's population, and one of the highest GDP and per capita incomes in the world. The growth potential for a company like Curaleaf are high in the scenario of Germany legalizing. In this scenario, the revenues forecasted in the Optimistic scenarios seem achievable.
Overall the fundamentals for Curaleaf are very impressive. The decade to date revenue growth rate is phenomenal and they are able to deliver this with consistent AEBITDA positive quarters. In addition, being a top holding of the MSOS ETF will be beneficial when funds flow back into the cannabis sector.
While the fundamentals are strong, Curaleaf is missing the hype and volumes of the Nasdaq/NYSE listed stocks. This is because it is stuck on the OTC exchange and misses out on institutional participation. During the cannabis bear market this may be the main reason the stock remains undervalued and trades at low valuations. While this would indicate a good opportunity for value investors, it is impossible to predict how long the company will remain a gladiator in the dog-eat-dog OTC exchange (Colosseum). Investors need to consider this factor and set expectations accordingly. Without the Nasdaq/NYSE listing and institutional participation, volumes of shares traded might remain low. The low volume of stocks traded makes it easy for market makers and short sellers to manipulate the share price. With a limited number of shares, the stock is often suppressed, triggering panic and stop losses from retail investors. These shares are accumulated via disproportionately high dark pool volumes, which can be seen on sites like Stockwatch.com. And with the investor base primarily retail investors, investor sentiment can be manipulated via well orchestrated social media posts designed to cause Fear, Uncertainty and Doubt (FUD).
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Information sources and charts
As mentioned, the Investor Presentation and Financial results are a must read for any current or new investor.
You can also stay informed by following the company and senior management on Twitter and joining the conversation with fellow investors on Stocktwits and other platforms. Curaleaf is active on Twitter @Curaleaf_Inc. The Founder and Chairman, Boris Jordan is also active on Twitter and can be followed @Boris_Jordan.
Curaleaf has an active investor community on the Stocktwits Curaleaf page.
But the ultimate form of research in my opinion is boots on the ground research. I am based in Canada and have not had the opportunity to visit a Curaleaf dispensary. But will drop by at a dispensary if there is one close by during my next visit to the US. For those interested in doing their own boots on the ground research, Curaleaf has dispensaries located in Arizona, Arkansas, Connecticut, Florida, Illinois, Maine, Maryland, Massachusetts, Michigan, Nevada
New Jersey, New York, North Dakota, Ohio, Oregon, Pennsylvania, Utah and Vermont.
The following are charts from TradingView that can be clicked on for more detailed charts and data.
This page, along with the analysis and tables included will be updated on a regular basis. If you are a Curaleaf shareholder who wants to stay stay informed with the latest bull/bear scenario analysis, feel free to add this page to your browser favorites.
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Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2025 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 15 stocks covered in the Best Cannabis Stocks analysis, I own only High Tide, which I am holding as a long-term investment. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, Trulieve, Curaleaf and any other stocks that will have a dedicated page. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.