After a miserable year for the cannabis industry, an industry-focused Wall Street company has said investors should prepare for the same in 2022.

Viridian Capital Advisors, a New York-based financial and strategic advisory firm dedicated to the cannabis market, released a report this month outlining its forecast for the U.S. cannabis market.

Valuations will remain depressed

Cannabis stocks are cheap compared to expected results in 2021 and 2022 and could become cheaper next year, Viridian said

Valuations of U.S. cannabis companies have compressed so much that companies are trading at an average enterprise value / sales multiple of 2.3 for 2022 and an enterprise value (EV) / EBITDA (earnings before interest, taxes, depreciation and amortization) of 8.0. This is a significant drop from a year ago prospective multiples of 4.1x and 16.4x, respectively, Viridian said.

He blamed the price suppression on a lack of institutional investment. Viridian said until this is resolved, there will be few catalysts for a widespread hike.

Before there is any significant institutional investment, federal legislation must be passed to give the cannabis industry access to the U.S. banking system. Not only will banks provide capital to institutional investors, but they will also take care of asset trading and custody. Viridian said he didn’t expect to see such federal legislation until late 2022, possibly after the midterm elections.

Viridian expects valuations to remain compressed for at least the first three quarters of 2022. Possible reasons for this compression include concerns about slowing growth due to delays in establishing new cannabis markets. recreation in New Jersey and New York; and developing price pressure. markets such as Arizona, Illinois, Massachusetts and Michigan.

“We anticipate that the execution of expansion initiatives will be a key driver of near-term performance as some companies struggle to integrate acquired assets and construction projects, in some cases due to challenges beyond their control. “Viridian said in the report.

The company said investors should focus on two areas to find outperforming stocks: undervalued traders capable of gaining shares by executing growth initiatives, and likely M&A targets that may provide a pop to short term take-out.

Stocks Viridian expects to outperform based on the execution of growth initiatives include: Ayr Wellness (AYRWF), Goodness Growth Holdings (GDNSF), Harborside (HBORF), Marimed (MRMD), Jushi (JUSHF) and TILT Holdings (TLLTF). All of these stocks are traded in the over-the-counter market, which can be illiquid and very risky.

The company believes that the following companies could be candidates for acquisition in the short term, while also having interesting growth opportunities in their own right: 4Front Ventures (FFNTF), Cansortium (CNTMF), Goodness Growth, Harborside, Lowell Farms (LOWLF) and Planet 13 Holdings (PLNHF). These are also traded over-the-counter.

Viridian said, “Cheap valuations become even more compelling when you consider the longer-term outlook and upside potential as we look to the years to come and what the space might be valued at when institutional investors will eventually be able to invest without problem and as operators. see the fruits of their ongoing expansion efforts. “

Longer-term upside potential for investors

Viridian’s conservative forecast for 2023 and 2024 assumes revenue will grow 25% in both years with stable margins. The company estimates that U.S. cannabis stocks will trade at EV / EBITDA multiples of 5.7x for 2023 and 4.6x for 2024.

“These multiples represent valuations commensurate with more mature industries without high growth opportunities or future legislative catalysts,” said Viridian. As for the cautious projection of 25% sales growth, the current consensus estimate for 2022 revenue calls for 58% year-over-year growth. Meanwhile, 2023 and 2024 are expected to see higher growth given the looming recreational cannabis launches.

The company said that given the projections for a significant rise, “investors should buy today even in the face of short-term pressure in order to capitalize on the reasonable potential return over two years. many other areas where investors can justify a two-year upside doubling in public companies like we can with cannabis. “

Here are Viridian’s other predictions for 2022:

1. Larger multi-state operators (MSOs) will lose shares to smaller operators.

2. Industry consolidation will accelerate.

3. Significant legislative progress at the state level, including recreational use in populated states, will not matter for stock yields.

4. Falling flower prices will continue to be a problem. However, this pressure presents opportunities for brands and service providers.

5. Software games continue to garner traditional institutional investments. Institutional interest is a harbinger of what will happen to plantation operators after banking legislation.

6. Debt will become cheaper for even smaller operators. Access to capital will fuel growth and mergers and acquisitions (M&A).

7. International opportunities will become a priority for US operators.

8. Smart operators will cover interstate sales opportunities.