Cannabis Stock Valuations Reflect No Expectation Of Federal Reform: Study
A new valuation analysis by Viridian Capital Advisors suggests that U.S. multi-state cannabis operators (MSOs) are trading at levels that indicate no expectation of federal rescheduling or 280E tax relief. The firm conducted a discounted cash flow (DCF) study of 15 cannabis companies, modeling a worst-case scenario where 280E remains indefinitely, growth slows and EBITDA margins peak in 2027 before declining. Despite the bleak outlook, market valuations remain slightly higher than the model predicts, though Viridian explicitly states that this does not indicate confidence in federal reform.
Valuation Analysis: The Worst-Case Scenario For Marijuana Stocks
Viridian built a DCF model assuming that MSO EBITDA multiples should be compressed under current market realities. The analysis factors in:
- No repeal of 280E, meaning cannabis operators will continue facing high tax burdens.
- Slowing revenue growth, peaking at 9.8% in 2027 before declining to 6% and then 5%.
- Declining EBITDA margins, topping at 28.4% in 2027 before deterioration.
- A 25% tax rate on gross profit, calculated at 1.5x EBITDA to reflect current taxation realities.
- A required equity return of 18.8%, reflecting industry volatility and risk factors, including federal illegality and commoditization.
- Debt rates at 15%, aligned with trading yields of the most creditworthy MSOs.
Based on these assumptions, Viridian calculated that 2024 EBITDA multiples should fall between 3.95x and 4.93x. Yet, …