Cannabis is booming but shares of publicly traded cannabis multistate operators (MSOs) look very cheap and undervalued. Why?
The problem for this industry is that marijuana has not been federally legalized yet and we do not know when it will happen. The question is not if it gets legalized but when.
The vast majority of US citizens now support full legalization: 68% according to a recent Gallup poll. 68% support for anything is an incredible figure nowadays. The numbers surrounding support for marijuana legalization indicate that figure will only grow.
The Gallup poll broken down by age group:
Ages 18 to 29: 79% support
Ages 30 to 49: 75% support
Ages 50 to 64: 60% support
Ages 65-plus: 55% support.
The support for legalization changes with generations, and this demographic split suggests that support is only going to go higher. Eventually, what the people want, the politicians should provide.
Sen. Chuck Schumer of New York has proposed legislation aimed at removing marijuana from the Controlled Substances Act at the federal level, regulating it and taxing sales. While this is an encouraging fact, his proposal doesn’t have Republican support in the Senate and President Biden hasn’t even endorsed it yet.
At state level, legalization is a very different matter. 23 states and Washington, D.C., have legalized marijuana for medical use, and 18 states plus Washington, D.C., already allow recreational use by adults. In those states, the MSOs legally selling marijuana are growing revenue at an incredible pace. Some are growing revenue at rates of 30% to 50% year over year and will continue to grow extremely fast. The MSO cannabis industry is by far one of the fastest-growing industries in the US. But despite that growth, these companies trade at some of the lowest multiples of EBITDA in the market. Normally, companies with fast, sustained growth trade at a huge premium relative to the market and not a discount. Considering the speed at which these companies are going to grow for the next five years, they really should be trading at 3-4 times their current share prices.
But because marijuana remains illegal at the federal level, these MSOs pay a huge amount of income tax as subjects to the 280E rule. That tax rule prohibits these companies from deducting their operating expenses from their taxable income. While these companies are extremely cheap on earnings before tax, they aren’t cheap based on earnings after tax. For now!
When politicians finally take action that aligns our federal marijuana laws with the will of the majority of the US people, the insane tax burden that these companies pay will go away. Legalization will also allow the MSOs access to cheaper sources of financing and will bring more cannabis customers into stores. All of which is going to send the share prices of these MSO operators through the roof.
Unfortunately, we do not know if that will happen soon or later. For so long, these MSO’s remain sleeping beauties, waiting to be woken up.