Trulieve Cannabis: Put It On Hold For Now, Long-Term Prospects Look Good

Investment Thesis

Together with its subsidiaries, Trulieve Cannabis Corporation (OTCQX:TCNNF) works as a medicinal cannabis enterprise. Due to the harsh economic situation and Hurricane Ian’s impact on cannabis stocks, the company’s shares dipped in 2022. In 2023, it is estimated that some headwinds, especially economic-related challenges, will persist, which could further hurt the stocks.

Despite the near-term difficulties, the industry’s future is bright; growth of double digits is predicted between 2023 and 2028. In addition, the cannabis industry stands to gain considerably if the FDA approves food products containing cannabidiol or CBD. As the CBD market is expanding rapidly, the approval of this deal would be a significant development for the cannabis industry as a whole. The CBD industry was worth $4.6 billion in 2021, according to research from the FDA, and it was expected to more than triple by 2026.

The Storm: Hurricane Ian

Hurricane Ian, one of the most devastating storms to ever hit the United States, wreaked havoc on the cannabis industry in the third quarter of 2022. A large number of Florida dispensaries, over a hundred, were shut down. The largest Florida marijuana dispensary operator, Trulieve Cannabis, was forced to shut down over 60 facilities. The company’s third-quarter performance and sales, in particular, were affected by this catastrophe, leading to a decrease of 6%.

” Revenue decreased by 6% sequentially, impacted by macroeconomic conditions, foregone revenue due to the strategic shuttering of non-core assets, regulatory changes in Florida and the impact of Hurricane Ian.” – Kim Rivers

The company has overcome this short-term obstacle and is reopening the facilities it had to close because of the storm. I believe this will help the company’s revenue in the near future, and as a result, I anticipate a significant increase in revenue in the upcoming quarterly results.

FDA CBD Consideration In Food

The U.S. Food and Drug Administration is considering imposing regulations on foods and supplements that contain cannabidiol [CBD]. In a statement, FDA Deputy Commissioner for Policy and Science Janet Woodcock said the agency is currently considering three citizens petitions, a mechanism by which individuals and groups can request that the FDA make modifications to existing regulations and that a response would be forthcoming.

The agency has investigated potential legal avenues for marketing CBD-containing dietary supplements and traditional foods for years. The CPC is tasked with developing and implementing an interagency strategy for regulating cannabis-derived products that protect and promotes public health. A “high-level internal agency working group” was also established in 2019 to investigate potential paths for CBD in foods. The group was asked to assess the FDA’s current authorities and if legislative solutions could lead to more efficient and suitable paths.

The FDA continues to have concerns regarding CBD, including whether it is safe to consume it daily for an extended time or while pregnant.

CBD products are gaining in popularity, and the fact that they have been allowed in several states suggests that they are safe. As a result, I am optimistic that the FDA will eventually approve them. If the FDA approved these products, it would be a massive boon to the cannabis industry. According to Yahoo Finance, the U.S. cannabis beverage business was worth $752 million in 2022, representing over 70% of the global market. The global cannabidiol market was valued at USD 5.18 billion in 2021 and is forecast to grow at a CAGR of 16.8% from 2022 to 2030. Legalizing CBD by FDA would help leverage this lucrative market.

Medical Cannabis Market Outlook

Cannabis is now used to treat various health problems and symptoms, including cancer and diabetes. Due to its medical benefits, cannabis has been approved for medical use in several countries, with varying degrees of restrictions. Compared to other kinds of therapy, cannabis is safe and has only mild side effects. It is also used with other treatments to make them more effective or lessen the adverse side effects. This helps the market for medical cannabis. For instance, medical cannabis relieves chemotherapy-induced nausea and stimulates appetite. It is used alongside opioids to reduce opioid use and ease the pain.

By 2022, the global market for medical cannabis had grown to be worth $10.18 billion. By 2028, the market is projected to be worth USD 37 billion, expanding at a CAGR of 24% between 2023 and then. U.S. cannabis dominates North America. Medical and recreational legalization is helping the area market. The market will likely develop in the forecast period, as over 60% of the region’s population lives in medical cannabis-legalized zones.

Headwinds In 2023

Marijuana investors are aching for a return to the heady days of 2021 when shares of the AdvisorShares Pure U.S. Cannabis ETF skyrocketed after a year in which the ETF fell by more than 74%. Unfortunately, there seems to be no light at the end of the tunnel, and 2023 is likely to be nearly as bleak as 2022. This year, the success of cannabis stocks will be affected by three significant challenges.

Oversupply effects: Oversupply of marijuana will be the most significant cannabis stock headwind this year. When there’s more cannabis than the market needs, selling prices decrease, which squeezes sellers’ margins and hurts earnings. Lagging profits will likely lower share prices, barring hype.

Inflationary pressures: High inflation is another big problem for marijuana stocks this year. Since inflation is still high, the Federal Reserve will likely keep raising the federal funds rate, which controls how much it costs to borrow. That’s why growth equities like cannabis companies have struggled in 2022 and will continue to suffer in 2023. Growth companies need capital to expand; therefore, their stock prices are vulnerable to economy-wide borrowing cost hikes.

More problematic for potential investors is the fact that the vast majority of cannabis businesses are still incurring losses or turning a marginal profit and that many of them are running low on cash. That’s a double-whammy for average borrowing costs. For instance, the interest rate for TCNNF’s most recent debt financing, which closed on December 22nd, is 7.3% for the first five years, then a separate rate tied to the payout of five-year Treasury bonds, plus a kicker of 3.5% for the final five years of the payoff term.

Labor shortages: The U.S. labor shortage will likely weigh on marijuana stocks in 2023. Leafly reported that in 2021, over 428,000 legal cannabis jobs were created in the U.S. Jobs may expand similarly in 2023. Marijuana companies struggle to hire workers due to the high demand. But just as a surplus of cannabis lowers costs, a labor shortage raises wages, narrowing margins. Good workplaces like Cresco Labs and Green Thumb Industries are less likely to have high turnover.

Conclusion

Although marijuana stocks have a potential future, they are anticipated to take a severe hit this year due to headwinds expected to persist, resulting in higher operating expenses and, consequently, losses or narrower profit margins. Based on the information provided here, potential investors should hold off entering this company or industry until the short-term challenges have passed.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.