2023-05-18 11:02:19 ET
Summary
- Curaleaf Holdings, Inc. reported solid Q1 numbers, with revenues from continuing operations growing 14%.
- The MSO still has massive growth opportunities ahead, including a potential entry into the New York recreational cannabis market.
- Curaleaf stock remains cheap at only 6x current adjusted EBITDA.
The market continues to ignore the potential in U.S. cannabis stocks due to momentum trading and not the fundamentals. Curaleaf Holdings, Inc. (CURLF) remains the leading multi-state operator ((MSO)), but the cannabis market has made hitting financial targets very difficult. My investment thesis remains ultra Bullish on CURLF stock, with plenty of catalysts ahead.
Confusing Quarter Doesn't Help Curaleaf
Curaleaf reported Q1'23 revenues were up 7.5% versus last year, with continuing operations growing 14% YoY. The MSO exited unprofitable businesses in California, Colorado, and Oregon due to unattractive economics in those markets with thriving illicit markets.
The discontinued operations make the results difficult to compare. In addition, Curaleaf guided to a 2023 free cash flow target of $125 million due to exiting these businesses, but now the company has made some decisions to invest in growth opportunities beyond 2023 that will limit the just-set cash flow targets back in January.
The end results is a confused market, but Curaleaf still has strong plans for producing free cash flow. The company generated $73 million of adjusted EBITDA in Q1 and $30 million in operating cash flows from continuing operations.
Curaleaf is well positioned to grow internationally, with the near launch of adult-use sales in Germany along with the potential for New York regulators changing plans regarding ROs (medical incumbents like Curaleaf) currently restricted from opening retail stores for 3 years. The New York cannabis market alone is a $5 billion opportunity, previously thought to have disappeared until the recent ruling by New York's Cannabis Control Board provided hope the MSO will end up selling into the adult-use market by the end of 2023.
One the Q1'23 earnings call , Chairman Boris Jordan made the following comment:
We are hopeful that we can begin selling into the adult used market by quarter four in some form, which will be an important step towards elevating New York into a $5 billion in the pinnacle of East Coast cannabis.
The U.S. cannabis market alone is set to top $70 billion in annual sales by 2030 according to New Frontier Data while the 2022 revenues were only $30 billion. The cannabis stocks now trade like these growth opportunities no longer exist while a lot of media and political associations are now seeing the "social justice" efforts in New York and some others states are contributing to the downfall of legalized cannabis when the state regulators should prioritize tax revenue and public health.
In addition, Curaleaf is set to participate in the start of adult-use sales in Maryland on July 1 with 4 dispensaries, along with opportunities in Texas, Alabama, Kentucky, and North Carolina. Other key states like Florida will eventually approve adult-use cannabis again, highlighting why the growth story is still in the early innings.
Focus On The Cash
Curaleaf is now forecasting operating cash flows topping $100 million. Based on a goal of free cash flows in the $50 to $60 million range along with $75 million in capex, the operating cash flow target sits at closer to $125 to $135 million.
Despite all of the growth opportunities still existing around the world, the MSO needs to maintain free cash flow at these minimal levels to avoid needing to find more capital. Curaleaf ended the quarter with a cash balance of $116 million, but the company has a debt load of $594 million.
The stock has amazingly fallen to a market cap below $2 billion despite the company still producing annual adjusted EBITDA in the $300 million range currently. The MSO only has EBITDA margins in the 22% range now with the opportunity to boost margins along with still growing revenues over the next decade.
Curaleaf isn't the cheapest MSO stock, but the company does have access to the European market. The company remains the leader in the space, making the stock an ideal investment for the long term as the market has absolutely thrown away cannabis stocks.
Takeaway
The key investor takeaway is that Curaleaf Holdings, Inc. remains absurdly cheap. The MSO stock is priced like the company is going out of a business, while tons of growth opportunities exist in domestic cannabis alone. The market appears confused on some of the growth metrics due to the shifting business model at the start of 2023, but this only provides a further opportunity to buy Curaleaf Holdings, Inc. stock on the cheap.
For further details see:
Curaleaf: Ignored Cannabis Catalysts