Cannabis Industry Growth Outlook Remains Strong After Sluggish Summer Sales – New Cannabis Companies

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You are reading an issue of New Cannabis Ventures’ weekly newsletter, which we have been publishing since October 2015. The newsletter contains unique insights to help our readers stay up to date, as well as links to the week’s most important news.

Friends,

Summer 2020 was a great time for the legal cannabis industry, with sales skyrocketing in even the most mature markets like Colorado and Oregon. There were many reasons for the robust growth, some temporary, some more sustainable in our view. The short-term drivers of the sales boom last summer included high fears, additional time and stimulus checks. At the same time, consumers were not spending money on travel, dining, and leisure, leaving more for cannabis use. These drivers were missing this summer. At the same time a year ago, cannabis companies considered essential service providers were able to switch to curb delivery and collection. E-commerce took off, also made possible by new forms of payment processing, and this created a more lasting positive momentum for the cannabis industry.

For June and July, we found slower growth in several states, as well as Canada, based on government data or BDSA estimates. This trend continued into August, with several markets declining year over year. The slowdown in short-term growth was a big topic of discussion in the second quarter conference calls held in August. The issue came up on Trulieve’s conference call on Friday to discuss the closing of the acquisition of Harvest Health & Recreation. For two of their major markets, Arizona and Florida, seasonal factors played a role in recent trends. Additionally, Florida has discontinued telemedicine as an option to receive a card. While patient growth has certainly slowed, we note that it remains robust:

Patient growth began a little over a year ago, aided by telemedicine and an influx of residents. Even when compared to these difficult comparisons, and with telemedicine no longer an option, this relatively mature medical cannabis market continues to see 46% annual growth in enrolled patients. The annualization of the data for the past thirteen weeks, which is now stabilizing, suggests an annual growth rate of 26% in patient numbers. According to state data, the four-week period ended September 30 saw 60% growth in medicinal cannabis products and 80% growth in flowers compared to the same period a year ago.

Despite the slowdown in patient growth, overall demand for cannabis remains quite strong, as evidenced by the annual growth rates for medicinal THC cannabis and for flowers.

Investors seeing the slowing or even negative growth in some markets might conclude that the outlook for long-term growth may be deteriorating, but we believe this is a premature conclusion. First, the harsh comparisons will wear off shortly. In addition to the strongest growth last summer, which should help us move past that timeframe, the re-acceleration of the pandemic since August could revive some of the temporary factors we discussed. Second, many markets are seeing sales expand, which will help drive growth. For example, in California, which is underserved, there are retail stores. Illinois is another market with too few retail stores, although the recently issued new licenses will help meet this challenge. Third, new stores will open in the coming months, including New Jersey. Finally, we remind our readers that consolidation is happening at a rapid pace. This will allow leading public companies to grow through acquisitions even if overall consumption trends continue to weaken.

We feared that year-on-year comparisons with last year’s sales would prove difficult, and it does. Each market has different dynamics, including licensing structure and market maturity. The most mature markets, like Colorado and Oregon, have little public company exposure. If we look at the other markets, despite some concerns, they seem to have years of strong growth ahead of them. Entering new adult markets and the opportunity to consolidate the industry through acquisitions suggests that despite these difficult short-term comparisons, investors should be optimistic about growth ahead.


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Sincere,

Alan & Joel

Alan Brochstein, CFA

Alan is based in Houston and leverages his experience as the founder of the online community 420 Investor, the first and still largest due diligence platform focused on publicly traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and enable its sustainable growth. At New Cannabis Ventures he is responsible for content development and strategic alliances. Before Alan, who started his career on Wall Street in 1986, switched his focus to the cannabis industry, he worked as an independent research analyst after over two decades in research and portfolio management. A prolific writer with over 650 articles published on Seeking Alpha since 2007, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source for the media including the NY Times, the Wall Street Journal, Fox Business , and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | E-mail

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