Trulieve Cannabis: Profitable, Expensive, with Declining Profitability Margins

Trulieve Cannabis Corp. (TCNNF) engages in the provision of medical cannabis products. The firm cultivates and produces its products in-house and distributes them to its branded stores and directly to patients via home delivery.

Its products include smokable flower, inhalation, oral, sublingual, topical, inter-nasal, and concentrates. The company was founded on September 21, 2018, and is headquartered in Quincy, FL.

Shares of Trulieve Cannabis have had losses of approximately 40% in the past year. I am bearish on TCNNF stock now, considering it richly valued.

Trulieve Cannabis Business News

The company has dispensaries in the states of California, Connecticut, Florida, Massachusetts, Pennsylvania, West Virginia, Arizona, and Maryland, for a total of 164 dispensaries. The bulk of them are located in Florida – 114, to be precise.

The latest business news includes TCNNF launching Live Diamonds by Muse™:

“Live Diamonds are the latest innovation from Trulieve’s state-of-the-art hydrocarbon extraction lab, the only one of its kind in the state of Florida. The initial product release of 500 units sold out within 24 hours, and Trulieve anticipates another batch of Live Diamonds to become available for sale in February 2022. The launch strain, White Fire Alien, exhibits subtle, natural flavors with a retail price of $45 for 0.5 grams.”

Growing its list of dispensaries in the U.S., on January 7, 2022, the firm announced that it opened a new Trulieve-branded medical marijuana dispensary in Philadelphia. It is the company’s 160th dispensary nationwide.

Q3 Earnings: 15th Consecutive Profitable Quarter

TCNNF stock earnings in Q3 2021 were lower than expected. The GAAP EPS figure of $0.14 was a miss by -$0.12. Revenue of $224.09 million was a beat by $2.05 million.

Year-over-year for the three months ended on September 30, 2021, net revenue increased 64%, gross profit increased 51%, but gross profit as a percentage fell six basis points from 75% to 69%.

Operating expenses surged 105%, and net income rose by 7% to $18.6 million versus $17.4 million in Q3 2020.

Fundamentals – Risks

Quarterly sales growth declined for the past three consecutive quarters in 2021. This may raise concerns as its annual sales growth is also declining and losing momentum.

After the explosive sales growth of 12,173.6% in 2017, in the subsequent year’s revenue growth declined to 419.8%, 145.9%, and 106.3% in 2018, 2019, and 2020 respectively. On a sequential basis, in Q1, Q2, and Q3 of 2021, revenue growth declined to 15.1%, 11%, and 4.2%, respectively, compared to a growth of 23.6% in Q4 2020.

Trulieve Cannabis Corp has a strong balance sheet with a debt/equity ratio of 0.4 as per the latest quarter, with several key metrics raising worries.

Both gross margin and operating margin have been declining over the past two consecutive years. Net income margin has tumbled from 70.4% in 2019 to 12.1% in 2020 and 11.6% as per last quarter.

Shareholders have been substantially diluted in the past 12 months, with total shares outstanding rising by 53.4%.

On top of that, Trulieve Cannabis has a consistent cash burn problem. In 2020, it reported a free cash flow figure of -$42.3 million and in Q3 2021, free cash flow of -$53.1 million. The cumulative figure of free cash flow in the first nine months of 2021 was -$128.3 million.

Valuation

TCNNF stock is relatively overvalued based on its P/E ratio of 36x compared to the U.S. pharmaceuticals industry average of 24x and overvalued based on its PEG ratio of 2.6x.

Wall Street’s Take

Turning to Wall Street, Trulieve Cannabis has a Strong Buy consensus rating based on seven unanimous Buy ratings assigned in the past three months. The average Trulieve Cannabis price target of $67.72 represents 165.4% upside potential.

Conclusion

Trulieve Cannabis is profitable in terms of EPS, but it has a cash burn problem. Its valuation is not cheap. The uncertain scenario of cannabis legalization in the U.S. market is another risk factor. Profitability has been declining, which is not supportive of the stock price.

Download the TipRanks mobile app now

​To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.