CURLF - Curaleaf Has Fallen Down And Can't Get Up

2023-04-20 11:03:04 ET

Summary

• I have followed Curaleaf closely since it went public in 2018.
• The company is the biggest American cannabis operator, but its market share isn't dominant.
• I called out the stock as expensive relative to peers in January, and I am not yet bullish on Curaleaf.

I wrote about Curaleaf (CURLF) in January, calling it cheap but with better alternatives for investors. Since then, it has dropped a lot.

After this sharp decline to an all-time low, perhaps it is now a buy. I don't think so! In this piece, I discuss the valuation and the outlook and find that the stock doesn't stand out to alternatives.

A Look at 2022

The company was supposed to report its Q4 in late March, but it cancelled. Yesterday, the company provided an update , suggesting it will be restating its 2021 and 2022 reports. In that piece, it guided to Q4 revenue of $352 million, slightly below the analyst outlook of $354 million, and 2022 revenue of $1.337 billion. This would be almost 12% growth over the restated 2021 revenue.

Looking at the Q3 report, Curaleaf reported total revenue for the first three quarters of $990 million, up 11.3% over what it originally reported in 2021. Gross margin before adjustments for changes in biological assets improved to 50%. Adjusted EBITDA was $241.6 million, a margin of 24.4%. The company generated $71.5 million from its operations and spent $99.2 million on the purchases of property, plant and equipment.

Curaleaf ended Q3 with cash of $197.7 million and total debt of nearly $600 million. It also had income tax payable of $167.3 million.

A Look Ahead

For 2023, analysts expect revenue to grow 12% to $1.5 billion with adjusted EBITDA increasing 22% to $402 million, a margin of 26.8%.

For 2024, they are looking for revenue to increase 7% to $1.6 billion with adjusted EBITDA rising 11% to $448 million, a margin of 27.7%.

The Valuation

Before the big decline, I thought Curaleaf was cheap, but I was concerned that it wasn't cheap enough. Now, it looks in line with Green Thumb Industries ( OTCQX:GTBIF ), but more expensive than the other large peers.

The next level of MSOs trade much cheaper in my view, but Curaleaf trades above its peers. The level is very cheap, though, in my view.

I had projected a year-end price of $6.34 three months ago, assuming 3X projected 2024 revenue, which is now lower a bit. I am now using 2X, which is 7X projected adjusted EBITDA. This lower price target is $3.81, which is up 56%.

The Chart

Curaleaf printed a new all-time low, finally taking out the low from early 2020:

The stock is down 43.1% in 2023, and this is more than its four large peers:

As I look at the near-term chart, the stock appears to be locked into a downtrend still, but it trades at a substantial discount now to its 150-day moving average at 46% lower. While the volume has picked up over the last week or so, there has been no sign of capitulation yet:

The stock is ~66% lower than where it peaked in early December, and it may have put in a low. I see resistance at $2.75 up to 3.65 and note the falling 50-day moving average near $3.25.

One of my big concerns has been how exposed the large AdvisorShares Pure US Cannabis ETF (MSOS) is. When I wrote three months ago, it represented 20%. Now, it is slightly smaller, as the ETF has sold some after getting redemptions, but it's still hefty at the second largest position. MSOS owns 22.3 million shares, which represents 16.75% of the ETF. This weighting is higher than Curaleaf's market share or its relative market cap, and the stock could be at risk of further selling by the ETF.

Conclusion

With the price so much lower, I like Curaleaf more now, but I don't include any in my model portfolios. Beyond the risk of MSOS getting redemptions and being forced to sell some Curaleaf, I find its valuation is not relatively attractive. Further, the company's lateness with its filing its annual financials for 2022 is concerning. I do expect the stock to do better over time, but I am going to be patient on adding it to my model portfolios.

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