2023-07-31 12:23:03 ET
Summary
- Mastercard has pushed to block debit card transactions in the cannabis space, potentially moving the sector more towards cash.
- Curaleaf appears more focused on the Germany opportunity than any payments issue.
- The cannabis MSO reports Q2'23 earnings after the close on August 9 with the focus on positive cash flows.
- The stock remains a buy on dips due to long-term catalysts, including the potential approval of the Safe Banking Act due to this payments issue.
Last week, Mastercard ( MA ) sought to end debit-card cannabis transactions in a potential blow to the industry. The move could oddly finally push the Safe Banking Act to the finish line as the industry faces higher risks from more cash transactions leading to violent robberies. My investment thesis remains ultra Bullish on Curaleaf Holdings ( CURLF ) heading into Q2'23 earnings on August 9.
Payments Headache
Mastercard requesting payment processors and banks to stop taking debit purchases from legal cannabis dispensaries is a temporary blow to the industry, but dispensaries ultimately have the option to conduct business in cash. The cash business isn't ideal due to the elevated risk for robberies, but the large MSOs (multi-state operators) have the financial resources to offer security.
Bloomberg reported the Mastercard move to clamp down on cannabis transactions and wasn't clear whether Visa ( V ) has made the same level of efforts to block transactions. According to MJBizDaily , Dutchie has pivoted to pushing Bitcoin transactions as a way to bypass the debit card issue while some think the solution is ATMs within cannabis stores to easily facilitate cash transactions.
The MSOs haven't generally provided any statements on the financial impacts. Verano Holdings ( VRNOF ) President Darren Weiss retweeted the Reuters article to complain about the situation without providing any financial details as follows:
The intriguing move was Curaleaf Chairman Boris Jordan deciding to focus on the German cannabis market potential without addressing the Mastercard issue. One might conclude Mastercard is more of a headache than any financial impact with his active Twitter/X account breezing right past the crucial payments issue to focus on other opportunities.
All Eyes On Q2
Curaleaf is set to report Q2'23 results on August 9 after the market closes. The company will no doubt provide additional details on the Mastercard plans to eliminate debit purchases in the cannabis space.
The stock actually jumped 7% on Friday in a sign the market isn't actually concerned about debit purchases. The real opportunity is for Senator Schumer to push forward with the SAFE Banking Act to ultimately provide banking options to the sector.
The new act has the potential to allow a company like Curaleaf to uplist to the major stock exchanges. The crucial moves is clearly the U.S. stock exchanges with TerrAscend ( TSNDF ) struggling despite uplisting to the Toronto Stock Exchange.
Also, investors are looking for the elimination of 280E. The cannabis companies continue to pay excessive taxes due to the illegal federal operations not allowing the utilization of operating expenses to cut or eliminate the tax burden similar to a normal business.
Curaleaf set a target for strong free cash flow generation of $50 to $60 million in 2023 before any resolution to both the approval of adult-use cannabis in Germany and the altering of aggressive regulator decisions to virtually block MSOs from the New York adult-use retail market. In addition, the MSO paid $156 million in federal income taxes last year that would substantially dip with the elimination of 280E.
The market will definitely want to see Curaleaf maintain strong cash flow targets for the year. Maryland adult-sue sales started on July 1 providing some immediate upside with Curaleaf having 4 retail dispensaries.
The stock has a market cap of $2.5 billion with an EBITDA target of ~$350 million. Curaleaf isn't the cheapest MSO, but size could provide an advantage with the ongoing payment issues. Besides, the MSO should start producing solid free cash flows to again provide a competitive advantage over small retail dispensaries struggling with both capital to run operations and physical security to handle cash transactions.
Takeaway
The key investor takeaway is that the Mastercard news appears more of a headache for the large MSOs like Curaleaf. The companies have the financial resources to shift to cash transactions and hire necessary security. The opportunity still remains for cannabis sector growth in areas like Germany, New York and Maryland.
Curaleaf remains a stock to buy on any weakness.
For further details see:
Curaleaf: Mastercard Headache