On Feb. 1, Senate Majority Leader Chuck Schumer and fellow Democratic Sens. Cory Booker and Ron Wyden announced their intentions to push major federal cannabis legislation. They plan to release a discussion draft in the early part of this year. We still think legalization is likely going to take a couple of years, as we forecast a change to federal law by 2023. Nevertheless, legalization sooner than that would unlock growth and capital access sooner but doesn’t change our estimated market potential of US$ 85 billion by 2030 compared with an estimated US$15 billion in 2020, according to the Marijuana Business Daily.
In the statement, the senators said they intended to gather input from all stakeholders and include social equity measures for the benefit groups. In addition, as we’ve noted before, even with the Democrats controlling the Senate legislation agenda, any form of federal law will require 60 votes and thus, Republican support. Additionally, the statement included the phrase “ending federal marijuana prohibition” rather than “national legalization." As such, we continue to believe that the most likely outcome is the removal of federal prohibition and the recognition of a state’s right to set its own cannabis laws within its borders.
Curaleaf and Green Thumb rose by mid-single-digit percentages, while most Canadian names rose by double digits. As our views and forecasts remain unchanged, our fair value estimates and no-moat ratings are intact. Given the massive rally across the industry since President Joe Biden’s election in November, most stocks trade in 3- and 2-star territory. Only Aurora Cannabis remains in 4-star territory, but we reiterate its extreme uncertainty rating underpinned by its reliance on dilutive equity issuances for funding its losses in its early growth stage.
Only U.S. multistate operators Curaleaf and Greenthumb and Canadian producer Canopy (through its standing acquisition of U.S. MSO Acreage) have economic exposure to U.S. legalization through both their operations and improved access to traditional capital like banks and national stock exchanges. All other Canadian producers we cover would have to build or buy U.S. THC operations, which might prove costly in the flood of investment we expect for the industry upon the removal of federal prohibition.
Nevertheless, all cannabis companies we cover are likely to see a flood of investment. We note that even though the Canadian operators already trade on the New York Stock Exchange and Nasdaq, institutional ownership remains notably low for the entire industry. The removal of federal prohibition is likely to invite a flood of institutional and strategic capital that would drive valuations higher.
