MSOs 2025 Outlook
In Need of Regulatory Catalysts
The year was not gentle to US cannabis investors. Rescheduling and Florida legalization did not happen, fundamentals were mostly uninspiring, and valuations reached all-time lows. We expect 2025 to repeat the theme of slow growth due to a continuation of price compression offsetting higher volumes, tough retail dynamics, competition from hemp-derived THC, and a dearth of new states legalizing.
While companies have become more efficient, most have already cut significant costs, which means margin expansion is becoming harder to achieve. On the backdrop of challenging fundamentals, a valuation rerating relies on regulatory catalysts such as rescheduling or Pennsylvania legalization (both with reasonable chances of happening in 2025). The new administration could bring uncertainties with other changes happening at a rapid pace (SAFE Banking?), such that sentiment could swing drastically following a “gradually, then suddenly” wave of reform.
In this case, many MSOs may look to raise capital, especially Tier 2s; however, if regulations (and valuations) remain stale in 2025, leveraged companies may face difficulties refinancing maturities, with asset sales as an alternative in H2/25 and 2026. Investors should focus on names with no near-term maturities, ability to generate significant cash flow, scale, and diversification. The Tier 1 pond is where investors should fish, and Green Thumb is the best fish to catch, in our view.
Highlights:
Tier 1s Are Undervalued
Our new status quo market forecast has a five-year CAGR (2024e-2029e) of 4.6% to total legal cannabis sales bracketing $38.0bn in 2029e. On this forecast, our top-down sector valuation indicates Tier 1s should trade at a 2025e EV/EBITDA multiple of 8.3x, which is relatively in-line with the average target multiple from our bottom-up valuations of 8.9x, and much higher than the current multiple of 4.4x. As such, we believe Tier 1s remain undervalued even in a scenario with no nearterm regulatory reform such as rescheduling or additional states legalizing. We think the discrepancy of our valuation vs market multiples is mainly due to terminal values; the market appears to overweight near-term regulatory setbacks and underweight the long-term trend of cannabis legalization, neglecting the growth potential of an industry that will (maybe slowly but surely) continue its march towards full legalization.
2025 Predictions:
- The sector needs regulatory catalysts to re-rate; absent that, MSOs may remain in a sideways market. We think rescheduling is likely to happen in 2025, which would suffice to flip sentiment and drive multiple re-rating. Trump supports rescheduling and it is unlikely that his administration would want to delay the process. Other catalysts such as SAFE Banking, a DOJ memo, or PA legalization could materialize.
- Expect low revenue growth and flat margins. We forecast average revenue growth of 3.2% y/y in our coverage (vs. a decline of 0.2% in 2024e), with average adj. EBITDA margins of 25.1% (vs 25.3% in 2024e).
- Refinancings incoming. Many MSOs have maturities coming due in 2026, such that they will look to refinance this year. We think Tier 1s will have no significant issues, but Tier 2s might have difficulties refinancing if sector valuations do not improve; in this case, we think they may look to divest certain assets.