Albeit listed in Canada, the company operates essentially in the U.S. Of note are the peculiar backgrounds of its chairman — the Russian-American businessman Boris Jordan, a star investment banker known to advise oligarchs — and of its majority shareholder, Andrei Blokh, a former partner of Roman Abramovich.
Established in 2010, the company's financial history remains opaque till 2016, as its first public equity raise dates from 2018. Two highlights however: the company is still losing money — with a cash-burn before acquisitions of about $170mil — and it will require more capital to fulfill management's vision of becoming "the world’s leading cannabis company".
Of course, a substantial market opportunity shines in the horizon. While the U.S. legal cannabis industry is projected to total $16bn in 2020, total cannabis demand is estimated to total $75B-$100B, including markets serviced by illicit actors. 37 states have already legalized medical cannabis, and 12 out of these 37 have allowed adult-use for recreative ends.
So far most of Curaleaf's efforts have focused on securing cultivating and processing license — costs and requirements vary by states — as well as acquiring peers across the value chain, from distribution to manufacturing. Growth of consumption per capita as new product forms, such as edibles and vapes, lead to proliferation of uses; building up a comprehensive offering takes time and money.
Management believes that vertical integration will distinguish Curaleaf from peers in their race to scale. Channel ownership burdens the cost structure, but it undercuts the middlemen — a rewarding feature in what should remain a high-margin retail segment — and enables products to reach consumers faster. In frontier markets, speed drives control.
Last year, the takeover of Grassroots propped the store count up to 135 venues, while the buyout of Select earlier in 2020 expanded wholesale to more than a thousand stores. With 2.2 million square feet of cultivation capacity, 180,000 patients served and 30 processing facilities, Curaleaf sports an unparalleled cost-to-coast footprint and ranks as a serious contender.
Despite the onset of the COVID-19 pandemic — or perhaps because of it — and thanks to these acquisitions, Curaleaf succeeded at growing revenue by 29% and adjusted EBITDA by 45% sequentially in 1Q20. It has also captured sizeable market shares in key states such as New Jersey or Florida, for a 14% market share nationwide.
Regardless, analysts see the integration of Grassroots as well as the expansion of regulated markets and conversion of illicit markets as major catalysts going forward. With $155mil in pro forma revenue, Curaleaf should widen the gap with its two closest followers, GTI and Trulieve, each with approximately $100mil in revenue.
Valuation-wise, shares trade at bubble-like PE ratios — a la Tesla, Netflix, etc. — but surprisingly affordable EBITDA multiples related to enterprise value, notwithstanding the fact that Curaleaf represents an ideal acquisition candidate for heavyweights such as Aurora, Canopy or GW Pharmaceuticals.
Value investors will look elsewhere, of course, but growth enthusiasts and momentum players may be keenly interested in following the next move. At this point, the key risks are an investor retreat — for instance if the pot rush came to fade — and the federal Department of Justice taking a closer look at cannabis M&A transactions.
Curaleaf is a position in Marketscreener's US portfolio.