Click here to read the previous cannabis market update.
Investments in the cannabis market have taken a beating across the board throughout 2022, and, as far as Q2 goes, losses have piled up for even the biggest players out there.
With companies of all valuation sizes and operation models feeling the pain of the financial realities, the cannabis investment storyline finds itself at a difficult moment with only a few points of long term optimism ahead.
Here the Investing News Network (INN) offers investors a closer look into the highlights of the Q2 period in 2022 for the cannabis investment universe.
Cannabis market update: US names struggle today, but have brighter future than Canadians
According to a financial advisor with a keen sense of the progress of the cannabis stock market, there may be a similar financial struggle between Canadian and US-based cannabis operators — but the reasons are very different.
Charles Taerk, president and CEO of Faircourt Asset Management, is encouraged by the growth expectations for the total addressable market in the US and its impact on the players currently participating in it.
Despite the bulk of US operators suffering from share price losses, Taerk said this downturn is not associated with fundamentals, since he actually sees proper execution from leading firms and “pretty strong” cash flows.
“If you look at the state by state market, there are more states that are going to generate a billion dollars in revenue in 2022,” Taerk said.
The financial executive said the market will see more states transitioning from strictly medical to a recreational program. “The ground game in US cannabis is very strong,” he said.
On the other side of the border, several financial experts, including Taerk, have long called out the problems with the Canadian market and its operators.
“We are overweight in the US cannabis names and extremely underweight in the Canadian names,” the financial expert said.
Rami El-Cheikh, strategy partner at EY-Parthenon and the cannabis lead for the firm, told INN he is growing concerned about the domestic market share of the Canadian public leaders despite their splashy spending.
“Market share of the biggest players in the space (continues) to decline, despite all the acquisitions, despite the large portfolio of brands that they have, yet their market share continues to decrease,” El-Cheikh said. “That's a bit alarming.”
As for this most recent financial period, Taerk pointed specifically to some of the major issues ailing Canadian firms: poor execution from companies, a lack of cash flow, an inability to brand and an oversaturation of dispensaries.
“Increasingly what you're seeing from the Canadians is they're less focused on the Canadian market and more focused on building in Europe or looking at (options) to get into the US,” said Taerk. “And those are both years away.”
One bright spot Taerk pointed to when it comes to the Canadians is for smaller publicly traded and private companies pursuing efficient business models and stealing the dominant market share of the leading producers with unique products.
“It's not all bad in Canada,” said Taerk. “But in terms of moving the needle for the most investable companies, the largest most liquid names, we don't see significant changes on the horizon.”
Cannabis market update: Waiting game for US cannabis reform leads to frustration
Cannabis business in the US continues to find itself in a gridlock of sorts. While new states continue to open their markets or adjust the size of them with increased product availability and interest, the federal framework is severely lagging behind.
The inability by the federal level of government to get any kind of meaningful cannabis reform across the finish line has resulted in an ongoing desperate feeling of frustration about when any changes may be arriving.
What started as an eager practice in patience has now diluted into an exasperated sense of irritation for current business operators.
The leadership team of cannabis-focused finance firm CapitalNow Cannabis expects to see a rush of capital investment from institutional players once a policy such as the SAFE Banking Act — or any federal reform — opens the doors to US-based investment with no consequence.
“Once the SAFE Banking Act passes, we should see a big uptake where you can see some of the stock prices go up 40-60 percent,” Joshua Reynolds, president of CapitalNow Cannabis, said.
The question then becomes: When exactly will this policy make its much anticipated arrival? The slow march of time is starting to get to the market.
“I think we're seeing a change in sentiment now that looks like SAFE Banking isn't going fast,” Gerry Wawzonek, president and CEO of CapitalNow Cannabis, told INN.
Leonard Tannenbaum, partner and CEO of AFC Gamma (NASDAQ:AFCG), expressed his frustration at the lack of progress for cannabis reform in the US.
He pointed to the
division among Democrats causing delays with the passing of any significant bill. “They have to do what's right for the industry and stop doing what's right for the political agendas,” Tannenbaum said.
Cannabis market update: Global economics and poor results take turns beating cannabis stocks
The entire global economy faces pressures at every level and cannabis is no different, leading to many price downturns and valuation declines despite steady operations in the US.
“Everybody's getting punished, no matter what,” Tannenbaum said.
Rebecca Conti Koar, senior VP of investor relations with US-based operator Ascend Wellness Holdings (CSE:AAWH.U,OTCQX:AAWH), told INN there is a very real drought of equity capital at the moment.
“A lot of the folks that (entered recently), kind of post the (Joe) Biden inauguration, they've kind of gotten fatigued because there's no new capital entering the space,” Conti Koar said.
The investor relations expert pointed to the majority of retail investors leading the charge in cannabis, when for a healthier market, more institutions would hold a stronger position in a sector.
The fatigue Conti Koar describes is playing a role in the battle of sentiment against results. “There's a severe dislocation between the fundamentals and the valuation,” Conti Koar told INN.
El-Cheikh said the capital market conditions slowing down entire markets around the globe is affecting cannabis more due to the already difficult conditions for companies.
“The entire industry is facing challenging capital markets conditions. It's not just cannabis, it's all other sectors,” El-Cheikh said. “But I think the cannabis industry is facing more challenges than others.”
The expert, who focuses on the Canadian side of the cannabis industry, said ongoing unprofitable quarters, high cash burn rates and “quite depressed” valuations have made it increasingly difficult for operators to raise capital.
The stock market issues ailing cannabis are not all so different from what’s come in the past, according to Taerk.
Taerk explained to INN he has seen disappointment from retail investors due to the lack of progress of reform at the federal level in the US.
“If there was a change in the regulatory environment, these companies would be trading at a much different cash flow,” Taerk said. “These companies have stronger cash flows, and are executing, but are still not able to be listed in the US.”
These barriers block a more significant entry for American investors, since most US operators trade in Canadian exchanges, according to the Ninepoint Partners executive.
“Equity market values are dislocated from fundamentals,” Taerk said of US operators, agreeing with the evaluation raised by Conti Koar.
Cannabis market update: What happened to the M&A rush for cannabis?
The cannabis industry is no stranger to an explosion of consolidation. Mergers and acquisitions (M&A) have played a significant role in the emergence of the cannabis space.
While key deals have been completed in 2022, investors have seen a slowdown compared to previous years when it comes to big brand deals between major publicly traded firms.
When asked what dictates M&A in the minds of operators at the moment, El-Cheikh said there’s been a clear evolution in the mentality of companies and an extended discipline when it comes to what to purchase.
“It's less about first mover advantage,” the EY-Parthenon expert said. “It's about investing in the markets that make sense – that have legal frameworks in place, they're big enough, and there's not a lot of players.”
Taerk told INN M&A has been affected due to the market conditions affecting the value of company shares.
In the short term, M&A will continue to face a dry spell since “people aren't as interested in taking shares as currency,” according to the financial advisor.
“However, that will change over the second half of the year, I think, as we get into Q3-Q4, where there are going to be some companies that want to continue but just are not able to,” he said.
Despite the poor market conditions complicating the proliferation of M&A, Conti Koar told INN the industry is “ripe for consolidation” at the moment.
For his part, El-Cheikh said he’s witnessing a legitimate struggle for deals to take place in Canada due to the ill-suited synergies between a lot of players.
“If I'm a cannabis company with a high cash burn and my capital at this point is very limited, why would I acquire another cannabis company that also has a similar cash burn? It doesn't make any sense,” the EY-Parthenon expert told INN.
In the long term, El-Cheikh said he expects to see interest in international M&A pick up as the European territory continues to open the doors for more cannabis availability.
Cannabis market update: Investor takeaway
Cannabis investments have a bright future by way of expected market growth and the ongoing opening process for new jurisdictions in the US and abroad.
However, as things stand both investors and companies appear at a limit of tolerance for the conditions of the market. Companies will continue to pursue their business models and adjust to the new realities of the market, but the lack of progress from the US federal level is draining momentum for the market quarter by quarter.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence