Potential Cannabis Rescheduling Reshapes Company Valuations

The U.S. cannabis industry just witnessed its most significant one-week valuation shift in three years, according to a new report from Viridian Capital Advisors.

The jump was spurred by news of the Department of Health and Human Services’ letter to the Drug Enforcement Administration recommending that cannabis be moved to schedule 3, according to the firm, which examined 14 prominent U.S. cultivation and retail cannabis companies with market capitalizations above $50 million for the report.

By closing hours on Sept. 5, the median valuation in relation to companies’ earnings (EV/2023 EBITDA) soared from 5.69x to 7.9x.

“These are the most extensive one-week changes since we began the Value Tracker three years ago,” Viridian wrote. “Based on our earlier DCF modeling, we believe the EBITDA multiple should be around 10x, even without the rescheduling and with the potential to go higher.”

Additionally, the median market-to-book ratio grew significantly, moving from 0.82x in the previous week to 1.33x after the announcement.

The analysis provided a detailed breakdown of valuation measures. Because averages can be skewed by outliers, the firm presented values for the lowest 25% of companies, the median, and the highest 25%.

Beyond Cultivation & Retail

The ripples of the rescheduling announcement aren’t confined to cannabis cultivation and retail companies either. The report hints at another beneficiary: the agriculture technology sector. These are the businesses behind the scenes, supplying the critical tools essential for plant growth, from specialized soils to advanced lighting systems.

Viridian also highlighted the market-to-book ratios of 19 agriculture technology companies. Their median ratio leaped from 44x the previous week to a whopping 61x after the announcement.

“Although the sector is not exposed to 280e, its customers, the (multistate operators), are,” the report said, adding that when (or if) those multistate operators experience a surge in positive cash flows and the cannabis capital market becomes more accessible, they’ll likely invest more in their businesses.

While it’s still early days, and the market is known for its unpredictable nature, the trends indicate a new potential trajectory in the U.S. cannabis sector that diamond-hand investors have been praying for at night.