Retail Densification And Automation Will Drive Long-Term Cannabis Market Leadership

Catalysts

About Ascend Wellness Holdings

Ascend Wellness Holdings is a vertically integrated, multi-state cannabis operator focused on premium branded products and customer-centric retail experiences.

What are the underlying business or industry changes driving this perspective?

• Accelerating consumer preference for cannabis over alcohol and the potential closure of the hemp-derived THC loophole could shift a very large volume of spend into regulated channels, supporting sustained double digit revenue growth and structurally easing price compression, which should bolster gross margins and earnings power.
• Ongoing densification of Ascend's retail footprint in high value states such as New Jersey and Ohio, including 13 pipeline stores and exclusive social equity partnerships, is set to increase vertical sell through, raise fixed asset utilization and drive higher revenue per cultivation asset, expanding EBITDA margins.
• Rapid growth of Ascend's leading brand portfolio, with category leadership for Ozone, Simply Herb and High Wired and the launch of new brands like Effin' and Honor Roll, positions the company to capture mix shift toward higher value branded products, lifting average selling prices, branded gross margin and overall profitability.
• Network wide automation across flower packing, vape filling, edibles and pre roll production is expected to materially lower unit production costs, increase throughput and improve consistency, directly enhancing gross margin, adjusted EBITDA and long term cash generation.
• Scaling of Ascend's integrated digital ecosystem, including AI driven e commerce, Ascend Pay and a tiered loyalty program with over 64,000 new accounts, should deepen customer engagement and basket size, raise same store sales and improve net margins through lower customer acquisition costs and more efficient promotions.

Assumptions

This narrative explores a more optimistic perspective on Ascend Wellness Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Ascend Wellness Holdings's revenue will grow by 6.3% annually over the next 3 years.
• The bullish analysts are not forecasting that Ascend Wellness Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ascend Wellness Holdings's profit margin will increase from -16.7% to the average CA Personal Products industry of 13.0% in 3 years.
• If Ascend Wellness Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $80.8 million (and earnings per share of $0.41) by about December 2028, up from $-86.3 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the CA Personal Products industry at 16.2x.
• The bullish analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent sector-wide price compression and aggressive discounting by competitors may force Ascend either to sacrifice volume by maintaining price discipline or cut prices to defend share, in both cases limiting long-term revenue growth and constraining gross and net margin expansion over time.
• Slower-than-expected regulatory progress, including delays in store approvals and uncertainty around federal reform and the hemp-derived THC loophole, could postpone the benefits of Ascend’s densification strategy and temper the shift of demand into regulated channels, weighing on revenue growth and earnings power.
• Ongoing promotional intensity and irrational pricing behavior from new entrants in key markets like Illinois, New Jersey and Ohio could structurally reset consumer expectations around price, undermining Ascend’s premium positioning and eroding vertical and third-party product margins, which would cap future earnings growth.
• Heavy reliance on continued store rollouts and high SKU innovation to drive vertical penetration and category leadership increases execution risk, as underperforming new locations or product fatigue could dilute returns on capital and depress long-run return on investment, pressuring both revenue productivity and EBITDA margins.
• Rising financing costs, lumpy operating cash flows driven by large biannual interest payments and ongoing capital expenditures for new stores and automation could strain liquidity if industry conditions worsen, limiting financial flexibility for acquisitions and growth investments and constraining free cash flow and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Ascend Wellness Holdings is $4.0, which represents up to two standard deviations above the consensus price target of $2.17. This valuation is based on what can be assumed as the expectations of Ascend Wellness Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $619.2 million, earnings will come to $80.8 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of $0.6, the analyst price target of $4.0 is 85.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.