In years past, investors paid close attention to US Cannabis MSOs and their revenue growth rates. Initially, these growth rates were very strong. As the companies mature, growth rates typically slow down, but to create future stock price growth, companies must continue increasing their earnings, and to do this, revenue increases are typically required. That is why there is a long-term high correlation between the revenue growth rate and the increase in stock performance.
This year, it is worth noting that there has been some slowdown in revenue growth on average across the MSO. Looking back at the end of Q1 2024 financials in the last twelve months, the average MSO had a growth rate of 6.6% over the last twelve months. That was a full 5% lower than the previous year, where the average growth rate was 11.6%. Some MSOs continued with strong revenue growth, while others had negative growth year over year in the last twelve months. Let’s look at and rank all the MSOs in two categories: the year-over-year percentage revenue growth and the change in growth rate compared to the previous year.
How Do We Measure Revenue Growth?
This may seem very basic, but there is some nuance to consider here. When MSOs press releases their revenue numbers, there is not always consistency. Companies often quote their revenue growth number compared to the last quarter. In my view, the most important number is the Last Twelve Months (LTM). So, in the upcoming year, I want to see the growth rate between the LTM ending Q2 2023 and Q2 2024 and then compare it to the previous full-year period. Analysts typically refer to this as Revenue Growth LTM compared to Revenue Growth LTM -1. Comparing the previous year gives a better picture than just comparing Q2 2023 to Q2 2024. Also, due to seasonality, it does not make sense to compare the growth between Q1 2024 and Q2 2024. This standard way of comparison is sometimes lacking in press releases, and you need to calculate it yourself. We will do this in our earnings editorials on the TDR website.
Revenue Growth Rates In The US MSO Cannabis Market
First, let’s examine the growth of MSO’s LTM earnings. To do this, we take the total revenue from Q2 2023 until Q1 2024 and compare it to the revenue generated as a percentage from Q2 2022 to Q1 2023. The chart below ranks the MSOs according to their percentage growth over this period. We can see that there is a very large divergence between the fastest revenue-growing MSOs and the lowest.
Change in Year over YearRevenue Growth Rates In The US MSO Cannabis Market
Next, we will examine and rank the changes in the MSO’s growth rates. We will look at the raw numbers. For example, if one company’s growth rate last year was 15% and this year is 10%, we will say that is a change of 5% instead of a decrease of 33%. Below, we add the column in yellow and rank it by Change in Revenue Growth. We note again there is a fair amount of disparity in the change of growth numbers for the MSOs.
Why are growth rates slowing for the US Cannabis MSOs
That is a great question that is impossible to answer with full conviction. I share three possibilities.
- I believe companies are shifting from growth companies to more mature ones, which will naturally slow revenue growth somewhat. It is harder to grow as a larger company at the same rate as it was possible to grow as a small company.
- I think many companies’ growth plans have been slowed by regulation. For example, if you have a business plan based in Florida, you are waiting for the regulations to change for adult use. Changes in 280E restrictions, or on a state level, could cause a large increase in growth.
- In some ways, MSOs have a commodity aspect; the price of flowers is variable based on supply and demand. In some states, prices have come down, naturally creating a headwind against revenue growth.
What to Watch During the Earnings Season in August?
I will watch the overall trend for companies, but I will also monitor each company to see in which direction it is trending and by how much. I will share this data as it becomes available after the companies release their earnings reports. Some companies do not share this information in their press releases, and it may take a few days to update our systems at Capital IQ / S&P.
Like Preparing for Earnings Season?
Check out our other blogs to help everyone prepare for earnings on topics like:
