Curaleaf Earnings: Cutting Valuation After Weak Results, but Shares Are Still Undervalued

We were disappointed by no-moat Curaleaf’s CURA second-quarter results, which included meager sales growth and a sizable margin contraction. Thus, we have reduced our fair value estimates to $17 and CAD 23 per share, down from $20 and CAD 27, respectively. Even so, shares are very undervalued even after considering our Very High Uncertainty Rating for Curaleaf. We think the market remains overly focused on the lack of progress concerning the potential easing of federal prohibition and mistake slower-than-expected growth as signs that the overall market potential has changed. In short, after 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.

In the quarter, sales grew 4% from last year and 1% sequentially to $339 million. While unimpressive, Curaleaf’s sales growth was in line with management’s guidance for low- to mid-single-digit percentage growth for the full year. We are more concerned by the margin contraction, as the gross margin declined to 44% from 48% in the first quarter and 55% a year ago. For comparison, competitor Green Thumb reported similar sluggish sales, but didn’t experience the same margin contraction.

We’ve trimmed our revenue forecast after these results, with our 10-year average annual growth estimate down to 12% from 13%. We also reduced our 2023 adjusted EBITDA margin forecast by about 200 basis points to 21% from 23%. Given the company has yet to generate positive free cash flow, changes in our revenue outlook can significantly change our valuation.

We reiterate our Very High Uncertainty Rating for Curaleaf. Given how new legal cannabis is, there is significant uncertainty around potential outcomes. Still, we think the market continues to overemphasize the lack of progress on easing federal prohibition.