Tallahassee Florida-based Trulieve Cannabis Corp. (CSE: TRUL) announced solid financial results for Q1 2019 ended March 31, 2019, and strong revenue guidance for the coming two years. Investors were not surprised however, resulting in little change in the stock price on the day of the news. The following day, the stock dropped 4%.
Cannabis investors may be getting more savvy. Revenue reports these days are more likely to wake investors up to the already-high valuation of a stock, rather than excite them about potential future gold rushes.
The company had a good quarter. Q1 2019 revenue was $44.5 million, up 24% from the previous quarter ending December, 2018. Gross Margin improved from 58% to a solid 67%, and—rare among cannabis companies—the company reported a positive Net Income of $14 million.
Their revenue prediction was potentially even bigger news. They predicted $220-240 million in 2019 and $380-400 million in 2020. Why didn’t this drive the stock price higher?
The bottom line on Trulieve
As we said, valuation. The stock currently has a Price to Sales ratio of 13. While not very high for the cannabis industry, it is still significantly higher than in a mature industry. In fact, it is 2.5x higher than in the tobacco industry. With investors paying 2.5 times more for a dollar of cannabis revenue than for a dollar of tobacco revenue, one can expect the cannabis price is inflated due to expected growth.
Trulieve’s Q1 revenue of $44 million suggests a current annual revenue pace of $176 million and climbing. So, it is already near the 2019 guidance of $220 million, and it is already adding new dispensaries and facilities. Multiply this by 2.5 times, the P/S inflation multiple, and one might reasonably assume the stock has $440 million in revenue already baked in.
No wonder investors did not get overly excited with reports of $44 million in Q1 revenue and predictions of $380 million in FY 2020.
Like most companies, Trulieve’s press release focused on the year-over-year Q1 revenue gain (192%), rather than its quarter-over-quarter gain (24%). This is understandable. But given how fast most companies are adding production capacity, YoY numbers are quickly irrelevant, and investors focus more on QoQ results.
Going forward, we expect investors will be more likely to drive stock prices higher from news about distribution gains, mergers, and positive income, than for revenue reports.
More about Trulieve
Trulieve is a vertically integrated “seed-to-sale” company, the largest fully licensed medical cannabis company in Florida, the third largest US market. It grows all its products in-house and distributes them to Trulieve-branded dispensaries in Florida, as well as directly to patients via home delivery.
Trulieve also has operations at various stages in California, Massachusetts and Connecticut. In Holyoke, Mass, it recently received approval to begin building its grow facility. Its recently acquired Connecticut-based dispensary is called The Healing Corner.
In Florida, its most established market, it opened four new dispensaries in Florida, bringing the total to 26 there. It also successfully settled with the Florida Department of Health, allowing it to be permitted to open 39 Trulieve dispensaries there—14 above the cap—since its original 14 were grandfathered in. This suggests it will maintain market leadership in the state over the long term.
2019 revenue guidance includes an expected increase in dispensaries in Florida as well as patient growth there due to the onboarding of smokable flower. Revenue and EBITDA from both California and Connecticut operations are also included.
Guidance for 2020 includes expansion into Massachusetts plus continued growth in Florida, Connecticut, and California.
Source: Trulieve press release