Stifel analysts had some sobering thoughts on the cannabis industry in the company’s recent first-quarter outlook report. The most positive comments went to Weedmaps as the analysts wrote, “We believe WM Technology is currently the best positioned public cannabis company to capitalize on category growth, with the ability to lead growth with unmatched capital efficiency, with the shares continuing to undervalue our robust growth outlook.”
The analysts said that their long-term outlook remained robust, but the near-term challenges are significant: decelerating category growth, oversupply, outsized pressure on lower-income consumer spending, rising input cost inflation, and increased capital costs. The average cannabis stock is down 34.5% year-to-date versus the S&P 500 which is -13%.
On a positive note, Stifel wrote, “We estimate the 1Q22 North American regulated cannabis sales grew 10%. We estimate Cronos Group and WM Technology’s 1Q22 revenue growth will dramatically outperform the category (+86%, 35% respectfully).” Even though the analysts tweaked their estimates for 2022 U.S. state-licensed sales, they still believe it will grow to $27.2 billion, +13% year-over-year, down from the previous $28.6 billion estimates. The year is also off to a good start as they believe first-quarter U.S. state-licensed cannabis sales grew +8% with key Western markets declining in 1Q22.
Analyst W. Andrew carter is keeping his Buy rating on WM Technology, Inc. (NASDAQ: MAPS), but is cutting his price target to $10 per share. The analysts wrote, “Our outlook suggests WM Technology will showcase a differentiated growth profile profitably capitalizing on cannabis category growth while utilizing its significant capital advantage to expand the platform’s reach and evolve its comprehensive SaaS offering for cannabis operators. We estimate 28% CAGR revenue growth (FY21-FY23E) predicated on increasing penetration, growing wallet share, and participating in the growth of six key U.S. markets we estimate will grow to over $13 billion in 2023.” The actual numbers could be even better because the analysts don’t include a significant contribution from the Canadian adult-use market or new adult-use markets like New York and Connecticut. “We believe our outlook will prove conservative given the resources for advertising, product development, and M&A. We believe the current U.S. environment provides WM Technology the ability to enhance its platform and deepen its moat without competition from well-resourced technology companies, thereby enhancing the ability to capitalize on our $100 billion U.S. state licensed category estimate.”
Hydroponics Dry Up
The hydroponics business that showed so much promise has dried up for the time being. The analysts reduced their outlooks for both ScottsMiracle-Gro and Hydrofarm. “Our outlook now includes a deeper and longer hydroponics category recession with the category not resuming growth until 4Q22.” However, the two stocks still have buy ratings but lowered price targets.
The Scotts Miracle-Gro Company (SMG) now has a price target of $130 per share and was lately selling at $105. They wrote, “We believe the long-term earnings growth profile is dramatically undervalued. We believe this earnings growth will come into focus following F2Q22 earnings with our outlook suggesting 11% CAGR from the F2Q22 trough through FY24.” On a positive note, Stifel said that the Hawthorne business is undervalued within the current structure with capital allocation increasingly inefficient and likely crowding out investors. “But we believe the company will be unable to execute a separation potentially unlocking value even as hydroponics category conditions improve given the investment behind RIV Capital (RIV-CNQ). We believe the investment behind RIV Capital is a mistake and will require additional commitments from ScottsMiracle-Gro. We believe a standalone Hawthorne would be unable to support continued investments. We believe RIV Capital’s anchor investment Etain was expensive, and we view the strategy outlined by RIV Capital as undifferentiated with the investment potentially driving concern/scrutiny from Hawthorne customers.”
Hydrofarm Holdings Group Inc. (HYFM) now has a price target of $13 per share, but was lately selling at $9.56. “We believe that Hydrofarm is between a rock and hard place in the current environment with the category leader actively touting increased promotion and hydroponics category conditions deteriorating. But Hydrofarm is not at the mercy of the current environment, and we believe Hydrofarm is positioned to emerge stronger for a reacceleration in category growth as supply normalizes while new state cannabis systems present more fulsome hydroponics category growth opportunities.” Having said that the analysts think that the significant underperformance has pushed the shares to a level undervaluing the profit growth relative to peers in similar verticals. “We believe our outlook will prove conservative with enthusiasm likely to build for the platform’s earnings power as well as the ability to profitably capitalize on cannabis category growth.”
Stifel was pretty downbeat on Canopy Growth Corporation (WEED.CN). The analysts have a Sell rating on the company and a target price of C$6 per share. It was recently trading at C$7.82. The report wrote, “Even with additional cost savings, our outlook underscores the growing risk with Canopy not able to satisfy its C$600 million convertible debt maturity in cash while maintaining its minimum liquidity requirement. We expect additional actions to complement the recent cost savings initiatives, but we believe there are no actions Canopy can take to drive the equity price higher with the core issue, the need to reaccelerate revenue growth, increasingly difficult. When Constellation invested C$5 billion into Canopy Growth, the platform enjoyed an unmatched capital advantage for capitalizing on cannabis sector growth; through mismanagement and poor stewardship, in our view, by Constellation Brands, Canopy Growth is now at the mercy of a difficult environment with non-Constellation investors bearing outsized risk.”
The other sell rating is reserved for Aurora Cannabis Inc. (ACB) with a lowered target price of C$3.00. “Our outlook suggests Aurora will not return to y/y revenue growth until 2H23. While our outlook for profitability conforms to the company’s guidance, the outlook is uninspiring with our estimates suggesting just C$10 million in FY24 EBITDA implying an EV/FY24E EBITDA multiple of over 80x. The company cash needs are manageable but ongoing, and the company has $329 million of convertible debt due in February 2024 that we believe the company will have to manage the balance sheet through additional equity issuances yielding additional dilution.”
While some of the Stifel report is pretty downbeat, it really just seems like a reality check. Companies with mountains of debt coming due is certainly worth commenting on and if those companies don’t have growing revenue, then that’s a problem. The industry itself continues to grow which is why the analysts said the long-term outlook is good. It’s these near-term hurdles that some companies will be unable to jump.