Trulieve Cannabis Corp. (OTCQX:TCNNF) reported decent FQ1’22 earnings on 12 May 2022. Nonetheless, given the macro pessimism and bearish market conditions, its stock went on a mostly sideways action instead of meaningfully recovering. In addition, given the sluggish federal legalization, many cannabis stocks had also declined after the massive rally in early 2021. Given the upcoming midterm elections in November 2022, any cannabis investor should neither be betting their hopes on expedient legalization nor a quick rally in FY2022.
Despite the potential for recovery, we expect the cannabis market to be a long-drawn-out game, therefore, only suitable for long-term investors with high hopes and extra capital.
Trulieve Reported Decent FQ1’22 Despite Reopening Cadence
Trulieve Revenue and Gross Margin
For FQ1’22, Trulieve reported revenues of $318.4M, representing an increase of 4.2% QoQ and 64.2% YoY, attributed to the completion of its acquisitions and organic growth in sales. Despite the COVID-19 reopening cadence, we are encouraged that the consumer demand for cannabis products remained strong. In addition, there is growing acceptance for federal legalization, with 60% of Americans supporting medical and recreational and 31% for only medical.
Nonetheless, Trulieve also reported comparatively lower gross margins of 56% for the quarter, representing a continuous decline from 76.9% in FQ1’20 to 56% in FQ1’22. As a result of its aggressively expanding operations, we may expect its margins to hold steady at this range moving forward, instead of the historically elevated numbers.
Trulieve Net Income and Net Income Margin
Its net income profitability has also been declining YoY, partly attributed to its rapid expansion and transformation across its retail stores/ cultivation/ processing capacities. By FQ1’22, Trulieve reported net incomes of -$32M, with a net income margin of -10%. However, given that the company guided improvements by H2’22 due to its transformation process, we may see increased operating efficiencies, thereby contributing to improved incomes and net income margins then. We shall see.
Trulieve Selling/ Marketing, General/ Administrative & Net Property Plant And Equipment
It is evident that Trulieve has expanded rather aggressively in the past few quarters, given that its net PPE assets have grown by over 4 folds since FQ1’20. In addition, the company also spent more on its Selling/ Marketing expenses and General/ Administrative expenses, since these two segments account for a whopping 322% of its net income losses for FQ1’22. Given that Trulieve aims to open up to 30 new dispensaries while relocating six in Florida, we may expect increased operating expenses for FY2022 as well.
Trulieve Cash/ Equivalents, FCF, and FCF Margins
Furthermore, Trulieve also reported negative Free Cash Flow (FCF) of -$11.8M with FCF margins of -3.7% in FQ1’22, despite its expanded retail presence. Despite the growing consumer demand for cannabis, it is apparent that the company may continue to underperform on its GAAP FCF profitability for a while longer, as the company attempts to penetrate new markets in the next two years. Nonetheless, long-term investors should not be overly concerned, since these would eventually contribute to its top and bottom line moving forward.
Trulieve Debts and Share Dilution
As a result, we are certain that Trulieve will continue to rely on debts and share dilution to fund its growing operations and expansions moving forward. In the past two years, its debt had grown by more than 13-fold, from $38.94M in FY2019 to $541.18 in the last twelve months (LTM). Nonetheless, we believe that Trulieve has shown much restraint in its share dilution, given that long-term shareholders have only been diluted by 70% in the past three years. As a result, we are not overly concerned about Trulieve’s future expansion plans, as the management seemed rather competent and thoughtful.
Federal Legalization Could Happen By 2024
Trulieve Projected Revenue, Net Income, and Net Income Margin
Over the next two years, Trulieve is expected to grow its revenues and net income at a CAGR of 3.73% and 14.2%, respectively. For FY2022, consensus estimates that the company will report revenues of $1.18B and net income of $309M, representing an impressive YoY increase of 26.1% and 1713.8%, respectively. Nonetheless, the projected revenue is lower than Trulieve’s guidance in the range of $1.3B to $1.4B for the fiscal year, potentially attributed to the market pessimism and macro uncertainties. In addition, the company also guided flat FQ2’22 revenues, potentially contributing to the stock’s sideways action post FQ1’22 earnings call.
Based on the charts, we can also surmise that consensus estimates that federal cannabis legalization will potentially occur by the end of 2023 or early 2024. Given how competitive the cannabis market is in Canada, we can potentially expect similar cannibalization to occur in the US, consequently affecting Trulieve’s financial performance from FY2024 onwards.
Nonetheless, we expect the headwinds to be temporary, given how Trulieve remains a leading cannabis player in the US with 165 retail dispensaries by FQ1’22. In addition, assuming that the SAFE Banking Act is also passed into law, we may also see improved operating metrics for the company post legislation. With Trulieve projecting the legal cannabis market in the US to grow from $23B in 2021 to $46B in 2026, at a CAGR of 14.87%, we may expect the company to perform well in the future indeed, given its market leadership and expertise over Canadian operators, such as Tilray (TLRY) and Aurora Cannabis (ACB). As a result, we do not expect Trulieve to participate in the bloodbath then since it would be able to preserve a certain amount of consumer brand loyalty, and consequently, sales and profitability.
In the meantime, we encourage you to read our previous article on Trulieve, which would help you better understand its position and market opportunities.
- Trulieve Vs. Tilray: Legalization May Not Be A Game Changer After All
- Trulieve Cannabis: Worthy Investment Despite Ambiguity On Federal Legalization
So, Is Trulieve Stock A Buy, Sell, or Hold?
Trulieve 3Y EV/Revenue and P/E Valuations
Trulieve is currently trading at an EV/NTM Revenue of 2.34x and NTM P/E of 39.22x, lower than its 3Y mean EV/Revenue of 4.56x but elevated from its historical P/E of 30.08x, respectively. The stock is also trading at $14.50 on 27 May 2022, down 63.9% from its 52 weeks high of $40.22 while nearing its 52 weeks low of $12.72. Therefore, it is evident that any investor gains in the past two years have also been completely erased.
Trulieve 3Y Stock Price
Given current undervaluation, consensus estimates also rate Trulieve stock as highly attractive now. In addition, given the tremendous momentum for the potential legalization of cannabis by the US federal government, we expect Trulieve to do well moving forward, given its market leadership in the US.
Nonetheless, investors must also be aware of the macro headwinds for the cannabis market in general, including the rising interest rates potentially impacting Trulieve’s future loans, the Ukraine war inflating production costs, and finally, the deceleration of consumer demand in key markets in comparison to the hyper-growth experienced in 2021. As a result, Trulieve could be facing significant issues in the next few months as a major cannabis company with an expanded retail/ cultivation footprint and potentially, unsustainable operating expenses given its lack of GAAP profitability. As a result, we may see further volatility moving forward, as the market and the stock continue to suffer in the short term.
Therefore, we still rate Trulieve stock as a Buy only for long-term speculative investors.