US Cannabis Legalization And Digital Health Will Unlock Opportunities

Key Takeaways

• Expansion into new states, operational efficiencies, and premium branding position TerrAscend for strong revenue growth and improved margins versus industry peers.
  
• Strategic M&A, digital platform expansion, and disciplined cost control create potential for sustainable earnings growth and increased market share as the sector consolidates.
  
• Ongoing price compression, rising competition, regulatory uncertainty, heavy expansion spending, and weak brand differentiation threaten TerrAscend's growth, margins, and long-term profitability.

Catalysts

TerrAscend Corp. cultivates, produces, and sells cannabis products in Canada and the United States.

• Analysts broadly agree that the entry into Ohio and New Jersey will drive revenue and margin expansion, but this could be understated given TerrAscend's track record in Maryland, where rapid vertical integration led to gross margins rising from 25% to nearly 60% in two years, suggesting outsized earnings upside as these learnings are applied and compounded across larger, higher-growth markets.
  
• Analyst consensus anticipates operational efficiency gains from ERP implementation and SG&A cuts, but with the exit from the Michigan market and a highly experienced new CFO who helped build a best-in-class financial system, the company may achieve ongoing structural reductions in OpEx below the industry average, leading to materially higher EBITDA margins and sustainable net earnings growth.
  
• As legal acceptance and normalization of cannabis use accelerates and state-level enforcement against illicit markets strengthens, TerrAscend's established first-mover retail positioning and premium brand strength in states like New Jersey, Maryland, and Pennsylvania positions the company to disproportionately capture new-to-category consumers as restrictions fall, turbo-charging top-line revenue growth.
  
• TerrAscend's ability to rapidly scale through disciplined, accretive M&A-backed by increased financial flexibility through new debt facilities and buyback programs-puts the company in a position to take advantage of distressed asset sales and sector consolidation, dramatically increasing market share and operating leverage, which should lift both revenues and net margins.
  
• The continued expansion of e-commerce and digital health platforms enables TerrAscend to efficiently reach broader consumer segments with differentiated offerings, lowering customer acquisition costs and unlocking new, high-margin direct-to-consumer revenue streams, which could significantly enhance both margins and long-term earnings power.

TerrAscend Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on TerrAscend compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming TerrAscend's revenue will decrease by 1.0% annually over the next 3 years.
• Even the bullish analysts are not forecasting that TerrAscend will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TerrAscend's profit margin will increase from -25.8% to the average CA Pharmaceuticals industry of 1.2% in 3 years.
• If TerrAscend's profit margin were to converge on the industry average, you could expect earnings to reach $3.7 million (and earnings per share of $0.01) by about September 2028, up from $-77.3 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 bullish analyst cohort, the company would need to trade at a PE ratio of 223.4x on those 2028 earnings, up from -3.5x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 4.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.3%, as per the Simply Wall St company report.

TerrAscend Future Earnings Per Share Growth

Risks

• Persistent price compression in core markets like New Jersey, driven by normalization and commoditization of cannabis, continues to reduce revenue growth and put pressure on gross profit margins, as evidenced by declining average retail prices per pound and a year-over-year decrease in wholesale revenue.
  
• Increased competition due to a rapid rise in store openings and potential for thousands of new licenses in Maryland, as well as possible large CPG or pharmaceutical company entry post-legalization, could further erode TerrAscend's market share, weaken its pricing power, and lower net income over time.
  
• Heavy reliance on a targeted M&A strategy, coupled with substantial capital expenditures for expansion and integration, presents ongoing risk that future acquisitions may not deliver expected synergies, thereby pressuring free cash flow and increasing debt burdens.
  
• Exposure to regulatory uncertainty at both the state and federal levels, including unpredictable enforcement actions against the illicit market or delays in adult-use legalization in key states like Pennsylvania, increases the likelihood of volatile revenues and inconsistent earnings.
  
• Failure to meaningfully differentiate its brands, particularly as consumer sentiment shifts or as alternative products and new delivery formats grow in popularity, risks stagnant or decreasing retail revenue and sustained pressure on net margins as cannabis becomes increasingly commoditized.

Valuation

• The assumed bullish price target for TerrAscend is CA$2.25, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TerrAscend'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 CA$2.25, and the most bearish reporting a price target of just CA$1.5.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $308.2 million, earnings will come to $3.7 million, and it would be trading on a PE ratio of 223.4x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$1.24, the bullish analyst price target of CA$2.25 is 44.9% 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.