Cannabis Investors Should Pay Attention to This Improving Trend

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Friends,

It was a year ago that we discussed how cannabis sales data might be volatile after compiling and publishing BDSA sales estimates in several markets for November 2020. At the time, we described the sudden slowing in year-over-year growth as a sign of the torrid growth in the summer of 2020 being a peak. Indeed, that was the case, and we have seen subsequent slowing, especially during the summer 2021 months, which faced very tough comparisons to the prior year.

The role of the pandemic on cannabis sales differed by market, but there was initial pantry-loading in most. Some markets were shut down entirely or highly restricted. Both of these factors made year-over-year comparisons difficult in Q2 last year. As we moved into the summer, these comparisons became very challenging, as many people received stimulus checks during the summer in 2020. Beyond stimulus checks, disposable income shot up, as people had few places to spend their money, with restaurants, travel and leisure shut down. Consumers not only had more money to spend, but they had extra time and a lot of anxiety. We continue to argue that some of the lift in sales in many markets in 2020 was likely transitory, but the massive boost to convenience caused by the additions of e-commerce and payment solutions that enabled curbside pickup and delivery likely played an essential role as well.

After a summer of negative growth in many markets and falling growth rates in all markets, we have seen signs of stabilization in most of the markets that BDSA covers in October and November. Two months doesn’t make a trend, but we were very encouraged to see very strong numbers out of Illinois and Michigan for December, reinforcing our view that positive growth rates should return in more mature markets. When evaluating growth, it’s important to look at year-over-year changes rather than relative to the prior month. First, the number of days can matter. Second, many markets have seasonal factors. Illinois, for example, saw a large sequential jump in July due to the Lollapalooza festival, with sales jumping 10% from June only to fall 5% in August. The chart below for Illinois and Michigan cannabis sales growth rates shows that Michigan bottomed out in September and has accelerated, while Illinois has flattened out at a solid 43% despite no new stores opening.

BDSA data for Massachusetts showed that year-over-year growth expanded from 40% in September to 42% in October and 46% in November. Growth in the more mature western states has been a roller coaster, with sales exploding to levels that seemed unimaginable ahead of the pandemic only to go negative a year later. All of these markets appear to have bottomed out as reflected by BDSA estimates:

While cannabis company revenue growth isn’t entirely dependent upon how the sales in their markets are growing, as many companies are expanding organically in their states of operation or into other states or by acquisition, the underlying demand for cannabis certainly plays an important role. Slowing market growth not only impacted investor sentiment in the back half of 2021, but it also, along with regulatory delays, likely prompted the increased discounting in certain markets late in the year. Looking ahead, we are hopeful that the growth rates will normalize at strong rates. With the tough comparisons now behind and some new markets opening over the next few years, we think cannabis operators should deliver high revenue growth.


While cannabis company revenue growth isn’t entirely dependent upon how the sales in their markets are growing, as many companies are expanding organically in their states of operation or into other states or by acquisition, the underlying demand for cannabis certainly plays an important role. Slowing market growth not only impacted investor sentiment in the back half of 2021, but it also, along with regulatory delays, likely prompted the increased discounting in certain markets late in the year. Looking ahead, we are hopeful that the growth rates will normalize at strong rates. With the tough comparisons now behind and some new markets opening over the next few years, we think cannabis operators should deliver high revenue growth.

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Sincerely,

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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