Cannabis Competition And Credit Risk Will Erode Margins Yet Stabilize

Key Takeaways

• Regulatory shifts could expand markets but also intensify competition, leading to price pressure and margin challenges for Verano.
  
• Limited banking access and persistent regulatory burdens restrict capital, valuation growth, and sustainable long-term earnings despite operational and branding gains.
  
• Margin pressure, reduced wholesale activity, capital access restrictions, leadership uncertainty, and tax burdens threaten Verano's growth, profitability, and competitive position amid industry instability.

Catalysts

Operates as a vertically integrated multi-state cannabis operator in the United States.

• Although gradual legalization across more U.S. states and momentum toward federal rescheduling could expand Verano's addressable market and open new sources of consumer demand, these regulatory wins may also lower industry entry barriers, intensifying competition and igniting price wars that erode Verano's revenue growth and compress long-term net margins.
  
• While Verano's focus on automation and operational efficiency has recently produced stronger gross margins-especially in markets like Florida and Illinois-persistent illicit market activity and accelerating third-party store openings in key states threaten to create ongoing pricing pressure, sabotaging margin durability and dragging on earnings as legal operators struggle to maintain premium pricing.
  
• Despite Verano's ability to maintain a robust presence in limited-license states and realize operational improvements, rising interest rates and tighter credit markets may complicate upcoming debt refinancing and make capital more costly, restricting the company's capacity to fund expansion plans, invest in store growth, and negatively affecting future net income.
  
• Even as institutional investment and broader financial market acceptance of cannabis companies could eventually improve Verano's access to capital for strategic acquisitions, the company's ongoing limited access to traditional banking and inability to uplist to major U.S. exchanges stifles liquidity and visibility, thereby dampening valuation multiples and limiting upside to shareholder value and earnings per share growth.
  
• While advancements in branded product innovation and successful new launches are driving near-term market share gains and higher sales per unit, state-level tax burdens and regulatory complexities like 280E persistently undermine bottom-line profitability, creating a structurally challenging environment for net margins and impeding sustainable long-term earnings growth.

Verano Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Verano Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Verano Holdings's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Verano Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Verano Holdings's profit margin will increase from -40.8% to the average CA Pharmaceuticals industry of 2.9% in 3 years.
• If Verano Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $25.7 million (and earnings per share of $0.06) by about August 2028, up from $-345.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, up from -1.0x today. This future PE is lower than the current PE for the CA Pharmaceuticals industry at 27.2x.
• Analysts expect the number of shares outstanding to grow by 4.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Verano Holdings Future Earnings Per Share Growth

Risks

• Sustained price compression and intensifying competition in key markets such as Illinois and New Jersey, where dozens of new dispensaries have opened, are driving down both revenue and gross profits, threatening long-term margin expansion and challenging Verano's ability to maintain its market share and profitability.
  
• Ongoing industry-wide credit quality issues among wholesale customers have forced Verano to purposefully reduce wholesale sales and implement a stricter accounts receivable strategy, resulting in a 21% annual and 8% sequential decline in wholesale revenue, which could limit revenue growth and cash flow if the legal market's financial health does not stabilize.
  
• Persistent federal illegality of cannabis continues to restrict Verano from uplisting to major U.S. stock exchanges and limits access to conventional capital, potentially forcing the company to rely on more expensive or dilutive financing options that could erode earnings per share and constrain shareholder returns.
  
• The resignation of Verano's President without immediate replacement and the possible organizational impact during a period of market and operational transition raise leadership stability concerns, which could affect execution of strategic initiatives and operational efficiency, ultimately influencing earnings and competitive positioning.
  
• Structural challenges such as high state and local taxes and the ongoing impact of IRS 280E disallowance on cannabis operators continue to compress net margins, making sustained profitability difficult unless there is substantive legislative or regulatory reform at the federal level.

Valuation

• The assumed bearish price target for Verano Holdings is CA$1.47, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Verano Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$6.0, and the most bearish reporting a price target of just CA$1.47.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $884.5 million, earnings will come to $25.7 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of CA$1.3, the bearish analyst price target of CA$1.47 is 11.8% 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.