Pink Market Capital Gives Trulieve A Rich Target Price

Independent cannabis research firm Pink Market Capital Research published Trulieve Cannabis Corp. – A Titan in the Making, which examined how Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) has managed to rake in more revenue during the past year than its competitors and is increasingly penetrating key emerging states despite falling margins in the U.S. cannabis sector.

“The report on Trulieve is our first published report here at Pink Horse Capital Research, where we aim to publish our findings on small & mid-cap equities, the companies that most research firms don’t cover,” the report said. “Though we aim to be unbiased, please note that we do have a position in the company.”

The report released on Sunday explored the company’s business model and growth strategies, its key financial metrics as well as the risks posed to both the company and the cannabis sector as a whole – subsequently assigning a fair value range for Trulieve of $79.30 – $96.92 per share. That’s a fairly lofty valuation as Trulieve shares were lately selling at approximately $12.70 and risk further slides.

Pink Market gets to this number with a couple of big market assumptions. First, the analyst believes Trulieve’s home state of Florida could add adult-use sales in mid-2025, boosting revenue. They also think the company’s key state of Pennsylvania could go that route as well by 2025. 

The report said, “This assumes a Nov ballot initiative in 2024 that would provide the framework for Trulieve to sell to adults over 21 in the state.” It then suggested that the company’s free cash flow would turn positive at a 10% yield to revenue beginning in 2025.

The report went on to posit that if Trulieve maintains a significant market share in its cornerstone hubs in 2026, that would lead to a 9.18% U.S. market share by 2030.

Thrive or Survive

Despite the slow crawl toward federal legalization, the global legal cannabis market size is expected to reach $134.4 billion by 2030, with a CAGR of 25.3% between this year and then, according to a new report by Grand View Research, Inc.

The report partly credited the growth to the rising geriatric population and increasing demand for cannabis for various medical purposes, such as management of chronic pain, mental disorders, chemotherapy-induced nausea and neurological disorders.

And while Florida’s medical marijuana market has been notoriously tough to enter for entrepreneurs, Trulieve performing well in the tax-friendly Sunshine State demonstrates opportunities for considerable growth. Those gaining sizable footprints in Florida’s emerging legal market more neatly position themselves for the implementation of recreational marijuana legalization.

For Trulieve, this means focusing on growing within current markets – rather than land-grabbing throughout the country – and building upon their “Hub” model approach, which emphasizes establishing cost-effective scale in regional markets near “pillar” states tucked into the corners of the country such as Philadelphia, Florida, and Arizona.

CEO Kim Rivers has hinted at the possibility of five hubs – setting the stage for effective interstate travel if approved by the federal government. Pink Market Capital Research expects Trulieve to enter more developed markets through M&A “when the company finds more attractive opportunities.”

And until federal legislation is passed and implemented, navigating the patchwork of nascent markets will remain a challenge for even the largest players – especially as inflation and rising interest rates cool down activity. 

At the same time, the legal industry will continue to languish behind an expansive illicit market that has always been able to offer more competitive pricing and bypass state taxes, rules and regulations that have burdened smaller operators struggling to penetrate the world’s oldest legal marijuana market.

California’s Democratic Gov. Gavin Newsom signed into law last month solutions meant to remedy the tax burden for many businesses in the state – eliminating a weight-based tax for cannabis growers but leaving the 15% tax on retail sales. The bill also allows the state to eventually raise retail taxes to make up for the lost cultivation revenue.

Decelerating consumer growth in Western states such as California and Colorado “suggests that the most established markets are nearing saturation of consumer participation, which stands in sharp contrast to the rapid growth happening in new and emerging markets,” according to a report by Colorado-based cannabis data firm BDSA Analytics.

“One market that deserves recognition is the massive Florida market, which saw its consumer participation rate jump from 24% in Spring 2020 to 49% in Spring 2022,” BSDA said.

Maintain a Win Formula

The report showed that Trulieve possesses a healthy balance sheet, “and there is minimal risk for the company to default on its debt or not pay its current obligations,” it said. “There is also ample cash to make opportunistic investments should the right circumstance arise.”

Risks that could limit potential growth for the company remain, it added. With nearly a couple hundred dispensaries, the retail-heavy company could more greatly feel the impact of federal legislation that restricts cannabis companies from being vertically integrated.

And whether Trulieve can repeat its success in Florida across other states is yet to be seen. The decision to sit out on emerging Northeast markets such as New Jersey and New York may or may not mature in the company’s favor. New York has recently had issues trying to crack down on budding off-the-books pot shops in lieu of state legalization.

“Time will tell if sitting out will hurt or help Trulieve in the long run,” the report said.