Trulieve Is Up Over 122% In 2024, But Where Does It Go Next? (OTCMKTS:TCNNF) (2024)

Trulieve Cannabis (OTCQX:TCNNF) stock is up by 122% in the last three months, and the multi-state operator's bull run could potentially continue for even longer, extending its stint of outperforming the market. But, it probably won't be its stunning operational achievements with improving efficiency or organic revenue growth leading its share price, at least not at first. In fact, the most critical factors influencing its stock's performance this year aren't even in its control at all.

Here's what could happen next and why.

Drivers And Catalysts

Last year, Trulieve brought in more than $1.1 billion in revenue, down from 2022's record haul of just over $1.2 billion. It cultivates, manufactures, and sells medicinal marijuana products, and though it technically competes in multiple state markets, 68% of its retail dispensaries are located in Florida. While it is unlikely that its pace of revenue growth will dramatically accelerate without experiencing any of the big catalysts we'll get to shortly, it should report at least a small amount of topline growth this year, and there are a few drivers and regulatory events that could or will be affecting this company for the rest of the year and perhaps even beyond that.

The most obvious driver is that it's opening a handful of new medicinal marijuana dispensaries across Florida, including very recently on March 9 in Palm Bay. In total, it now has more than 193 locations, 17 of which were opened in 2023, and management cites adding to its retail footprint as one of its priorities for 2024. Its focus markets of Florida, Arizona, and Pennsylvania will see the most investment, and it's looking to make around $70 million in capital expenditures along the way. Given that Florida is the country's largest medicinal marijuana market, with annual sales volume of approximately $2 billion, it is reasonable to expect that a lot of the planned capex will be allocated there. However, the limited scale of the planned openings is unlikely to lead to significant growth in the near term; its actual capex outlay was far larger over the last two years than what is planned for 2024.

Another pair of potential catalysts is the company's addition of a new Chief Financial Officer (CFO) as well as a new Chief Operating Officer (COO) in early January. It will take some time for the fresh leaders to make an impact. Overall, cycling in new talent during a period of gradual growth is a positive development.

The biggest catalyst for Trulieve would be if the federal government decides to legalize or reschedule cannabis. Rescheduling would be particularly favorable for Trulieve because it could leverage its presence in Florida to quickly convert its medicinal dispensaries into serving new inflows of demand for recreational marijuana without taking on a significant amount of capital investment in new stores or hardware. Competitors from out-of-state would likely struggle to establish themselves in its home market as well.

There are some signs of progress on the front of rescheduling that investors should be aware of. The Department of Health and Human Services (HHS) recommended to the Drug Enforcement Agency (DEA) to reschedule the plant from Schedule I to Schedule III. If that happens it would enable MSOs to claim deductions on their federal tax burden, which would be a decent tailwind for their stocks over time. But, the leaders at the DEA seem skeptical, and for this matter, they have the actual authority to make the change. If there is a shift in policy, it is likely to arrive towards the end of the year.

And there's one last critical catalyst that could be almost as good for Trulieve as federal legalization. There may be a ballot proposal prompting voters to decide on whether the state should legalize recreational consumption and sale of marijuana. The state's Supreme Court must rule by the start of April on whether the initiative can actually be put on the ballot. If the court gives the green light, and the voters deliver a majority in favor in November, Florida's cannabis industry could potentially double in size over the following few quarters. Trulieve's positioning is such that it is reasonable to expect it to capture a lion's share of the recreational market if that happens.

Obstacles

The path of Trulieve's stock has a few challenges it'll be navigating while executing its plan for this year. One of the inescapable issues facing the business is that its brands are not widely known outside of Florida due to it largely operating there and only on a minimal basis elsewhere. Thus, its road to building strong product brands and customer loyalty, which could one day lead to it developing a competitive advantage, will be even longer than that of its less geographically concentrated MSO peers in the event of marijuana legalization. For now, management is looking to continue shoring up its brands to retain its existing customers and start building a moat.

Another obstacle is its debt, which has been becoming less concerning over time. Over the last 12 months, it repaid more than $199 million of its long-term liabilities. It still has more than $769.6 million in long-term debt and capital lease obligations on the balance sheet. In Q4, it reported interest expense of $20.6 million, and its operating income was only $30.3 million. After paying taxes, it thus registered a net loss of $33.4 million. If management can continue to pay down its liabilities ahead of schedule throughout 2024, it could become profitable. If not, it will need to lean on its hoard of cash, short-term investments, and cash equivalents totaling $201.3 million.

Valuation

Trulieve's valuation is in the middle of the road compared to its peers on the basis of its enterprise value to revenue (EV/R). Consider this chart:

As you can see, it's neither showing signs of froth nor does it appear as a bargain considering that without any of its possible regulatory catalysts, its growth will be on the slower side. The market has clearly been pricing in the potential impact of those catalysts, and it may dump the stock if they do not occur. So at the moment, this is a risky investment.

Conclusion

Given the context of the catalysts in play, Trulieve stock could easily continue to fly, though its substantial downside risks stemming from the same events make it slightly unappealing to purchase at its current valuation compared to safer options in other industries. Remember, investors' hopes about new cannabis legislation, whether for banking reforms or legalization, have been dashed before on more than one occasion. It could also be the case that changing regulations will entail new or different operational requirements or tax burdens.

Over the long term, the company's strong presence in Florida and its efforts to develop a competitive advantage in branding may pay off. There isn't much evidence to suggest that its brands are significantly stronger than its peers, though its customer retention rate of 66% is a promising indicator. For now, this is only a stock for risk-tolerant investors who don't mind the high probability of a lot of volatility.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Alexander Carchidi