Though it's up for debate, legal marijuana might be the growth opportunity of our generation, with Wall Street analysts expecting global sales to grow by four to six times what was generated in 2018. This could put the cannabis industry on par with global giants like the soda industry roughly a decade from now. These estimates, along with the public's rapidly changing perception of pot, have investors excited about the long-term prospects for marijuana stocks.
North American supply chain problems lead to steep losses for most pot stocks
However, as we've witnessed in the early going, things don't always proceed as planned. Even though there's ample opportunity for legalization throughout North America and Europe to pull sales from illicit channels to the legal side of things, there have been plenty of hiccups along the way.
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For example, supply chain issues in both Canada and California have wreaked havoc on their respective weed industries. In Canada, regulatory red tape -- in the form of a backlog of more than 800 cultivation, processing, or sales applications at Health Canada -- has dramatically slowed the supply of cannabis to dispensaries. Meanwhile, oversupply in California, coupled with red tape in licensing new dispensaries, has caused supply bottlenecks. Many of these supply issues will take multiple quarters to resolve.
As a result of this slower-than-expected uptake of recreational marijuana in Canada and California, most marijuana stocks have seen sales and profit estimates fall considerably. For instance, Canopy Growth, the largest pot stock in the world, and the projected No. 2 grower by peak annual yield in Canada, is forecast by Wall Street to have grown sequential quarterly sales by a meager 4%.
And make no mistake: This isn't just an issue affecting Canopy Growth and the other largest pot stocks. Marijuana stocks are feeling this pain pretty much up and down the supply chain throughout North America, with most of them expected to lose money in 2019.
Of course, there are exceptions.
This U.S. marijuana stock is running circles around its competition
Whereas most vertically integrated dispensary operators are losing money -- and in some instances, an exorbitant amount (ahem, MedMen Enterprises) -- one multistate operator has been absolutely crushing it on the earnings front. Although the U.S. cannabis industry is still relatively nascent, Trulieve Cannabis (NASDAQOTH: TCNNF) has been its model of success.
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Like most vertically integrated U.S. dispensaries, Trulieve controls its supply chain from seed to sale. It owns grow farms and processing facilities, and sells its own product in its dispensaries, which means it's responsible for branding, marketing, and breadth of product selection, too. The company currently has approximately 170 different stock keeping units (SKUs) for medical patients to choose from, with close to 30,000 kilos of annual production capacity, as of April 2019. It was also responsible for selling 65% of all medical cannabis dispensed in Florida (in milligrams), as of April.
But unlike its peers, Trulieve has been incredibly profitable. Its secret sauce looks to be its laser focus on its home market of Florida. Whereas most of the multistate operators have arguably spread themselves thin by establishing a licensing presence in 10, 15, or perhaps even 20 states on a pro forma basis, Trulieve has been opening new grow sites and dispensaries in the Sunshine State, which currently allows medical marijuana to be sold, but may legalize recreational pot in 2020. Of Trulieve's 30 open dispensaries, 28 of them are in Florida.
By centralizing its focus on a single state, Trulieve has been able to effectively build its brand, while at the same time keep its expenditures manageable. In the company's first-quarter operating results, released last week, it reported year-over-year sales growth of 192% to $44.5 million, and delivered another quarter of solid operating profit, sans fair-value adjustments on biological asserts and one-time gains or losses.
According to the company's latest outlook, it should see full-year sales grow from $102.8 million in 2018 to a range of $220 million to $240 million in 2019, and $380 million to $400 million by 2020. As for adjusted EBITDA, it'll skyrocket from $45.6 million in 2018 to a range of $95 million to $105 million in 2019, and $140 million to $160 million in 2020. To put into context just how well the company's growth strategy is playing out, Trulieve was only estimating $214.3 million in sales for 2019 and $290.7 million in 2020 as recently as April.
Can anything stop Trulieve Cannabis?
Although Trulieve might appear to be the perfect pot stock -- and it certainly looks the part with the lowest forward price-to-earnings ratio in the entire industry -- no stock is without risks. The way I see it, Trulieve has three risks that could slow or derail its growth.
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First, there's the aforementioned growing likelihood that residents in Florida will vote on a recreational weed amendment in 2020. The recreational market is a different beast from medical pot, and there's the real potential of sales cannibalization if adult-use marijuana gets the green light in the state. Even though Trulieve has established itself as the top dog in medical cannabis, it would have to do so all over again for recreational pot if an amendment is passed next year.
Second, other multistate dispensary operators have witnessed the success of Trulieve Cannabis and are now beginning to push heavily into the Florida market. MedMen, which holds 82 retail licenses in a dozen states on a pro forma basis, plans to open as many as 30 retail stores in Florida. Trulieve may have the home field advantage, but new competitors popping up left and right could hurt its margins.
Third, through acquisitions Trulieve has expanded into Massachusetts, Connecticut, and California, all of which could be sizable markets for the company. But without that noted home field advantage, it's going to cost a pretty penny to establish a presence and build up its brand outside of Florida. It's unclear how much these added costs could hurt the company's bottom line.
For what it's worth, I don't personally believe any of these concerns will be enough to derail Trulieve completely, but do favor keeping an open mind for what's so far been the standout of all U.S. pot stocks.
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