Green Thumb Earnings: Cutting Fair Value as Price Compression Hits Growth but Shares Are Undervalued

Price compression continued to weigh on top-line growth in no-moat Green Thumb’s GTII first quarter, as revenue fell 4% sequentially to $249 million. This accelerated from the fourth quarter’s 1% decline as challenging economic conditions and a stubborn illicit market continue to pressure prices. Inflation has been a particular challenge, not just from a cost perspective but from cannabis’ competition for consumers’ share of wallet. On the bright side, Green Thumb sold more volume through more dispensaries as the legal cannabis market expands. Additionally, profitability remained intact with adjusted EBITDA margins virtually unchanged from the fourth quarter at roughly 31%.

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 a stubborn illicit market where consumers don’t face very high legal market taxes. Our 2030 adjusted EBITDA forecast falls to about $1.3 billion, down from about $1.7 billion and compared with 2022 adjusted EBITDA of $311 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 $35 and CAD 47 per share, down from $45 and CAD 61, respectively. We reiterate our Very High Uncertainty Rating for Green Thumb. Given how new legal cannabis is, there is significant uncertainty around potential outcomes. Still, shares trade about 80% 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 with 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.