This Big Cannabis Market Has Kicked Into Growth Mode

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Friends,

When it comes to the outlook for the American cannabis industry, there is a lot that leaves us optimistic about what lies ahead. While many are focused on the votes next month for adult-use legalization in several states, especially New Jersey, which could trigger other states to follow via their legislatures, as well as on the potential for the Senate to shift control, we think there is an even bigger story developing that will have profound implications for operators and investors: California

While many investors appreciate the potential of the market due to the vast size, they may be unaware that the market is transitioning to growth almost three years into legalization for adult-use. A month ago, we reported that sales in the state suddenly surged in July. Data analytics firm BDSA released its estimate for August, and, while many states saw sequential declines, California grew 3% to $343 million. This represented growth of 26% from a year ago:


After quickly ramping up after legalization began, sales were essentially flat for two years. In the early days, temporary licenses expired, limiting supply. More recently, the vaping crisis hurt sales beginning last September.

What has happened is that prices have declined but unit volumes have grown dramatically. Over the past year, units have increased 45% while price has declined 13%:
In some ways, the slow rollout of legal cannabis in California has been similar to Canada. A major challenge has been the lack of retail stores, especially the southern part of the state. Almost three years after legalization, there are only about 700 dispensaries, only slightly more than in the much smaller Oregon and much fewer on a per capita basis than Colorado. Oklahoma, which is roughly 1/10 the size of California, has over 1700 medical dispensaries. Many local jurisdictions have blocked out cannabis sales, but we note that almost two dozen ballot initiatives will take place in November. Another factor has been that the vaping crisis and then the pandemic hurt operators financially, especially smaller ones.

Despite the promise of California’s market, most of the major MSOs have been slow to enter the state in an aggressive way due to concerns about the regulatory environment and the strength of the illicit market. In a recent report we shared with subscribers at 420 Investor, we reviewed two dozen public companies with operations in California. Looking at the six largest ones by market cap, Curaleaf has a minor presence but picked up some exposure when it acquired Select. GTI has minor exposure, with a retail store focus as well as the Beboe brand. Trulieve bought a single dispensary. Cresco Labs made a major bet on the state with its acquisition of Origin House earlier this year, establishing itself as a leading player in the state with respect to branded products and distribution. TerrAscend has a significant presence with its 4 Apothecarium stores and its cultivation and manufacturing operations. Finally, Columbia Care just announced a substantial pending acquisition of a vertically integrated operator, expanding its relatively small prior position.

While California has struggled out of the gate, we think the world’s largest cannabis market is already the world’s largest legal cannabis market despite its challenges, with sales at an annualized rate in excess of $4 billion. We anticipate that one of the biggest trends over the next 12-15 months will involve substantial consolidation and investment by MSOs. With easy comparisons ahead due to the vaping crisis that dented sales a year ago, we expect investors will soon pick up on the state’s momentum.


Harborside is one of the oldest and most respected cannabis retailers in California, operating three of the major dispensaries in the San Francisco Bay Area, a dispensary in the Palm Springs area outfitted with Southern California’s only cannabis drive-thru window, a dispensary in Oregon and a cultivation/production facility in Salinas, California. Since inception, the company has generated over $400M in cumulative sales.

Co-founded by Steve DeAngelo and dress wedding in 2006, Harborside was awarded one of the first six medical cannabis licenses granted in the United States and today holds cannabis licenses for retail, distribution, cultivation, nursery and manufacturing. The company has played an instrumental role in making cannabis safe and accessible to a broad and diverse community of California consumers.

Get up to speed by visiting the Harborside Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.


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Sincerely,

Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the 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 facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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