Overvaluation Is Corrupting the Cannabis Industry
The cannabis industry is rife with major operators trying to win the day without considering the long term. Rather than looking inward to develop and improve, these businesses focus solely on the subsequent significant acquisition or merger for their gain, leading to overvaluation and plummeting stocks.
At the root of this problem is ego. Many multi-state operators (MSOs) buy up smaller canna-businesses hoping for a more significant market share, but they’re not doing the internal work required to develop this new industry. As a result, we see disruption and a lack of quality in the industry.
Read on to learn more about how overvaluation and a failure to look inward are crippling the future of cannabis — and what you can and should do differently.
Overvaluation Causes Stocks to Plummet
Thanks to overvaluation, cannabis stocks have been plummeting for some time now. People think more licenses will guarantee more revenue, so a higher valuation is promised. But when the business fails to meet those targets, people lose faith in the company itself and where the market is headed.
Unlike with other business types, it can be tough to get an accurate valuation for a canna-business; several factors add to the unpredictability:
- Market share: The number of licenses issued in a given state can change drastically from one year to the next, causing market share to dwindle without much warning.
- MSOs vs. social equity: Big MSOs are coming in and either buying out social equity applicants or leaving them there to fill a quota and lobbying for more licenses on top of an already saturated market.
- Real estate: Landlords intentionally jack up real estate prices because they know they’re sitting in a green zone, putting more pressure on smaller operators without access to the same funding that MSOs enjoy.
These overvaluation and market share problems aren’t new — they’ve played out in the cannabis industry before. Yet few businesses seem to learn from past mistakes and instead continue to repeat them.
Value Comes From Within
A great example of overvaluation and its impact is the recent acquisition of Columbia Care by Cresco Labs. Far from two industry giants wanting to work together, this acquisition happened out of necessity.
Because both companies failed to grow as projected, the only way they could hit their targets was to merge. Neither gained anything in the end; had they not merged, the valuation for each company would have been half of what their combined valuation is now.
How does this kind of overvaluation happen? It often boils down to a failure to look inward and adequately develop the business’s internal operations. That means:
- Hierarchy and communication are nonexistent. Important business questions go unanswered because no standard has been set for internal communication or handling fundamental business operations.
- No one pays attention to quality or operational excellence. People are just throwing stuff at the wall to see what sticks, not bothering to improve on what doesn’t work.
- People try to get ahead by screwing over others. Social equity applicants are being paid pennies instead of what they’re worth, and large operators are focusing on beating the competition as quickly as possible.
Instead, to develop the business’s value internally, large canna-businesses should consolidate departments and brands to create a recognizable, consistent franchise. That’s how you avoid overvaluation and protect your market share because doing so gives you a tangible brand presence in the market.
Cannabis Is a Business
According to a recent Politico analysis, “two dozen of the largest publicly traded U.S. operators… collectively lost more than $550 million in the first six months of this year on revenues of nearly $4.5 billion.” While the article claims this loss stems from federal illegality, that’s not necessarily the case.
Blaming federal illegality caters to the perspective of MSOs, enabling and perpetuating what’s disrupting the industry: overvaluation caused by bad business practices.
Aside from compliance requirements, cannabis is no different from other agricultural products. For a business — agricultural or otherwise — to run well, it needs proper internal governance for day-to-day operations and a commitment to quality, consistency, and growth.
The biggest issue facing these companies is their hitting marketing with venture capital. Since federal legalization is taking so long, investors are starting to ask when they will begin to see a return on their investment.
Unfortunately, it’s tough to predict when the money will start to flow, a problem that these investors should have known was going to be an issue from the very beginning due to the lack of federal legalization.
Overall, we need to promote intelligent business practices and sound valuations, given the legal constraints and current market conditions, rather than letting the excitement of the novel opportunities in cannabis turn into rampant overvaluations.
Think Long Term
Solving the problem of overvaluation in the cannabis industry requires a long-term focus. Don’t just aim to win the battle — dig your heels in and focus on quality and operational excellence so you’ll be equipped to win the war.
To do this, you’ll need to rely on allies whose strengths fill the gaps in your own. At HYC, we pride ourselves on understanding those gaps to help you strengthen proper business operations and profitability from within.
Ready to take the first step? Reach out to us to schedule a consultation.