This Key Cannabis Market Just Had a Positive Development

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The opening of adult-use sales in New Jersey, which could happen as early as May, is one of the big catalysts for 2022 that we have previously discussed. In addition to injecting revenue into the almost exclusively publicly-traded companies operating in the state, we think that this could capture media attention and potentially attract investors to the sector.

This week, we learned that New York, which had been expected to launch in 2023, may also launch later this year, which adds to the positive dynamic we envisioned. While some may be disappointed with how the state intends to award initial retail licenses to equity-entrepreneurs with a prior cannabis-related criminal offense who also have a background owning and operating a small business while not allowing existing medical operators to open adult-use stores simultaneously, we believe that this move could make the state’s launch extremely robust.

In many states and in Canada, the limited number of stores at the launch of adult-use programs stunted the initial growth in sales. Without adequate distribution, markets were slow to develop. On the Green Thumb Industries call recently, CEO Ben Kovler chided Illinois for its delay in issuing the social-equity licenses that have been caught up in litigation. The state’s adult-use program, now in its third year, has only 110 stores open, or one per each 115K residents. While we are excited about the pending launch in New Jersey, there will be only a limited number of dispensaries open initially, perhaps 15, which suggests a slow start.

If New York were to go live with only the existing 10 medical operators opening their allotted three stores, there would be only 30 stores in the entire state. The move to enable a sub-set of equity-entrepreneurs to have a head start will allow for a lot more stores to be open in the early days. Outdoor growers under the hemp program will supply these stores to some extent, but so will the existing operators. Thus, the current medical-cannabis operators may be temporarily disadvantaged by having to delay their store openings, but they will benefit immensely from being able to supply stores immediately and from having a strong launch. We don’t believe any analysts have included adult-use revenue at all in 2022. The earlier start and having a larger number of retail stores will likely drive even more revenue for these operators in 2023 than previously anticipated.

When states legalize, they must take into account many considerations, including taxation, equity initiatives and how to treat incumbents in the medical market. It wasn’t that long ago that the idea was floated that the existing medical operators would be barred from participating in the adult-use market. When the details were finalized, however, the incumbents serving the New York medical cannabis market ended up in a very advantageous position. While future participants in the market will be limited to three adult-use stores  the incumbents can have three adult-use as well as up to five medical-only stores. Only the existing 10 operators will be allowed to be vertically integrated. The regulatory structure in New York will likely lead to a lot of stores very quickly, which bodes well for the program’s future success.

We view this week’s news as very encouraging, as the launch in New York is likely to be much more robust than we have seen in other states that have legalized for adult-use. The state has addressed two challenges where other states have generally failed: create truly positive situations for social-equity entrepreneurs and hit the ground running on day one. In addition to benefiting the existing and new operators in the state, the New York launch of adult-use, like New Jersey’s, is likely to attract significant media attention.

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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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