Fully Legalized U.S. Cannabis Market Could Reach $59-$78 Billion, Rivaling Alcohol - Roth Capital

Roth Capital analyst, Scott Fortune, sees the States Act as the tipping point to cause valuation resets for cannabis U.S. Multi-State Operators (MSOs). With 33 medical states and 10 recreational states already legal, favorable public sentiment (66%, source: Pew Research) now supports full legalization of cannabis. The favorable view by the public should bring this to the forefront of the legislative agenda generating Bipartisan Congressional support to de-criminalize cannabis in the coming years.

Decriminalization, in the form of the States Act, is likely to be the impetus for institutional investment capital to enter into the U.S. cannabis and CBD industry and cause significant valuation resets for existing companies. This should shift the focus away from companies that have taken advantage of the capital friendly climate in Canada and refocus it on the larger market in the US. The analyst projects a $59-$78 billion total U.S. cannabis market today, that could in time rival the $200 billion U.S. alcohol industry.

There are already more than 20 cannabis companies with market caps above $500 million and the Multi-State Operators are likely to capitalize on 6 competitive advantages:

1) One-time conversion of a huge market from illegal to legal status;
2) High barriers to competition;
3) No need to supplant established incumbents;
4) Opportunity to create a high-end shopping experience that replaces low-end “mom and pop” settings;
5) A remarkable economics (measured in pre-tax margins) opportunity to supply one’s own high margin stores with one’s own high-margin products; and
6) Compelling new product opportunities, as cannabis discoveries continue to make news in the world’s leading medical journals – with no end in sight.

The passing of the STATES Act will exempt federal enforcement of individuals and corporations involved in cannabis operations in legal cannabis states. This removes the fear of persecution and opens up institutional capital and investment into legal cannabis states. We believe this catalyst will lead to an upside reset of the U.S. multi-state operators valuations. By simply assigning a similar 4.65x EV/Sales multiple to the cannabis TAM of $78 billion, there is a significant valuation opportunity for MSOs to total $360 billion in market capitalization. Currently the top 10 U.S. MSOs have an estimated total EV of ~$20B leaving a gap that amounts to an incremental ~$340 billion in enterprise value.

Related Stocks:

Aphria (NYSE: APHA)
Aurora Cannabis (NYSE: ACB)
Canopy Growth (NYSE: CGC)
Cronos Group (NASDAQ: CRON)
New Age Beverages (NASDAQ: NBEV)
Tilray, Inc. (NASDAQ: TLRY)

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