A cursory glance at Trulieve Cannabis (TCNNF) would suggest the company should be attracting a lot of attention from investors, as it has been growing at a decent pace without a lot of dilution.
Its primary market is Florida, although it's starting to take steps to branch out to other markets. Focusing on one major market has allowed Trulieve to scale out at a low cost, resulting in an impressive gross margin, which while being slightly down in the last reporting period, still remains robust.
The decline in gross margin was from the increase in dried flower sales which has narrower margins.
Even so, it would seem the gradual and consistent growth of Trulieve would generate a better share price, but my thesis is the very thing that makes Trulieve attractive to some investors, while drives others away.
We'll look at what that is in this article.
In the last quarter Trulieve generated revenue of $57.9 million, an increase of just under 150 percent. While it's not a bad performance by any means, it did lag behind a number of its peers, including some of the stronger-performing Canadian companies. As measured against its prior earnings period, sales were up 30 percent.
The company said sales growth was the result of increasing its store base to 30, and launching cannabis flower products. Consequently, the number of registered medical cannabis patients in the state increased.
Another significant thing to consider in the latest earnings report was while it did produce the big revenue boost, that was mostly from one-off fair-value adjustments valued at $66.2 million. Without that the company's gross profit was $37.6 million. With easily beat the $16.6 million in operating expenses, but still more modest than the numbers pointed to.
Why it's not getting a meaningful push
The major reason I see for Trulieve not getting a lot of interest from investors is the business model it uses. It would be more impressive if the business model it now uses was being incorporated a few years from now, but as the market stands today, it isn't built to deliver the rewards associated with a high-risk sector.
That's the problem Trulieve will have to solve. After all, why invest in a company in a risky sector if it isn't positioned to deliver a strong reward?
If investors want to invest in a safer stock, there are a lot of options they have to choose from within established and less volatile industries.
What some in the industry that support Trulieve do is point out its low costs and small amount of good will on its balance sheet. Again, if I want to invest in a low-risk stock, I don't want to waste my capital on a company operating in a high-risk sector. What would be the point?
So while Trulieve does in fact have these as perceived strengths, and probably over the long term, if it maintains its discipline as it scales to other states, should be a good performer.
But when measured against a number of its competitors that are poised to break out again once postive sentiment returs to the cannabis sector, it's not going to come close to bringing the potential upside investors are looking for when seeking companies that can deliver huge results.
The problem for Trulieve is its successful implementation of its business model; or in other words, its business model for where the cannabis industry is at this time, isn't that attractive.
Again, if investors want safety, they aren't going to look to the cannabis sector as a whole, they're going to go to much more traditional investments with proven track records when the market is jittery and volatile.
I do believe Trulieve will continue to chug along in its growth trajectory, and over the long term should catch a bid. In the mean time, when looking at where I want to place my money for higher potential rewards, there are better cannabis stocks to take a position in, especially after the big correction it has been going through.
Trulieve should make shareholders money, but some of the more aggressive companies will generate a lot more over the next couple of years.
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