Cannabis Industry Growth Outlook Remains Strong After Soft Summer Sales

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The summer of 2020 was a great time for the legal cannabis industry, with sales soaring even in the most mature markets, like Colorado and Oregon. There were many reasons for the robust growth, some transitory and others, in our view, more sustainable. Last summer, the short-term drivers of booming sales included high levels of anxiety, extra time and also stimulus checks. At the same time, consumers weren’t spending money on travel, restaurants and leisure, leaving more for cannabis consumption. This summer, these drivers were absent. At the same time a year ago, cannabis companies, deemed essential service providers, were able to shift towards delivery and curbside pickup. E-commerce took off, enabled as well by new forms of payment processing, and this created a more permanent positive driver for the cannabis industry.

For June and July, we noted slowing growth across multiple states as well as Canada, citing government data or estimates from BDSA. This trend continued in August, with several markets down from a year ago. On Q2 conference calls, which took place in August, slowing near-term growth was a big topic of discussion. On Friday, the topic came up on the Trulieve conference call to discuss the closing of the Harvest Health & Recreation acquisition. For two of their key markets, Arizona and Florida, seasonal factors have played a role in recent trends. Additionally, Florida ended telemedicine as an option for obtaining a card. While patient growth has certainly slowed, we note that it remains robust:

Beginning a little over a year ago, aided by telemedicine and an influx of residents, patient growth soared. Even against those difficult comparisons and with telemedicine no longer an option, this relatively mature medical cannabis market continues to see 46% annual growth in registered patients. Annualizing the last thirteen weeks of data, which shows stabilization now, suggests a 26% annual growth rate in patient count. According to the state’s data, the four-week period ending 9/30 saw 60% unit growth for medical cannabis products and 80% growth for flower compared to the same period a year ago.

Despite slowing patient growth, the overall demand for cannabis remains quite strong, as depicted in the annual growth rates for THC medical cannabis and for flower.

Investors seeing the slowing or even negative growth in some markets may conclude that the outlook for long-term growth may be deteriorating, but we think this would be a premature conclusion. First, the tough comparisons will ease shortly. In addition to the strongest growth taking place last summer, which should help as we move past that time-frame, the reacceleration of the pandemic since August may reinstate some of the transitory factors we discussed. Second, many markets are seeing expanding distribution, which will help drive growth ahead. For example, retail stores are being added in California, which is underserved. Illinois is another market that has too few retail stores, though the new licenses being awarded recently will help address this challenge. Third, new markets are opening, including New Jersey in the coming months. Finally, we remind our readers that consolidation is taking place at a rapid pace. This will allow the leading public companies to grow through acquisitions even if overall consumption trends continue to moderate.

We have been concerned that the year-over-year comparisons against last year’s sales would prove to be tough, and that has been the case. Each market has different dynamics, including the licensing structure and the maturity of the market. The most mature markets, like Colorado and Oregon, have little public company exposure. When we look at the other markets, they appear, despite some concerns with a few of them, to have years of strong growth ahead. Adding in new adult-use markets opening and the ability to consolidate the industry through acquisitions suggests to us that investors should be optimistic about the growth ahead despite these tough near-term comparisons.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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