Curaleaf Earnings: Cutting Fair Value Estimate as Illicit Market Stubbornly Weighs on Legal Growth Trajectory

No-moat Curaleaf CURA finally released fourth-quarter 2022 results on May 1 after a delay stemming from its conversion from IFRS to GAAP accounting standards. Fourth-quarter revenue reflected the ongoing challenges of selling legal cannabis in the current U.S. economic environment, with revenue growing just 4% sequentially. In comparison, full-year revenue growth was 12%. Also, profitability retreated, with adjusted EBITDA margin declining to 21% compared to 25% in the third quarter.

Further, management guided to 2023 revenue growth and adjusted EBITDA margin of low mid-single digits and mid-20%, milder than we had expected and reflecting the decision to exit California, Colorado, and Oregon. While exiting hurts topline growth, it should immediately help margins given that overabundant competition hurts profitability in these states. Although we continue to think the long-term market potential remains large, we now forecast it will take longer to get there than we previously expected. This is mostly due to stubborn illicit market where consumers don’t face the very high legal market taxes. Our 2030 adjusted EBITDA forecast falls to about $1.6 billion, down from nearly $2.1 billion and compared to 2022 adjusted EBITDA of $305 million. In the long run, we think governments are incentivized to more aggressively target the illicit market to support the budding legal industry.

Our dourer forecast leads us to cut our fair value estimates to $20 and CAD 27 per share, down from $25 and CAD 34, respectively. Still, shares trade at nearly 90% below our fair value estimate. We think the market continues to overemphasize the lack of progress on easing federal prohibition and mistake slower-than-expected growth as signs the overall market potential has changed. Compared to the massive expectations priced in a few years ago, we now think investors have swung too far the other way. But like growing a plant from seed to harvest, an investment in cannabis might require some patience.