North American Cannabis Will Face Oversupply And Risks Yet Recover

Key Takeaways

• Dependence on regulatory progress and geographic concentration makes growth and margins vulnerable to shifting laws, competition, and price compression in key U.S. markets.
  
• Industry oversupply, persistent stigma, and potential new competitors could limit sales momentum, erode margins, and challenge long-term earnings resilience.
  
• Heavy reliance on select Northeast markets and exposure to oversupplied, poorly regulated states threaten TerrAscend's long-term profitability, revenue stability, and shareholder returns.

Catalysts

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

• While gradual legalization and the normalization of cannabis in North America could increase TerrAscend's total addressable market, the company's revenue growth remains highly exposed to stalled or incremental regulatory reform and continued federal uncertainty in the U.S., which may limit access to capital markets and slow geographical expansion, weighing on long-term topline growth.
  
• Although demand for wellness and alternative therapies stands to drive future cannabis consumption, persistent stigma and economic pressures including falling discretionary spending could cap broader market adoption, suppressing category growth and thereby constraining TerrAscend's ability to sustainably increase sales volumes and premium pricing.
  
• Despite the strategic expansion into high-growth states like New Jersey, Pennsylvania, Maryland, and Ohio positioning the company for market share gains as adult-use matures, TerrAscend's heavy concentration in just a few regions exposes it to adverse regulatory changes, price compression and oversupply, which could create volatility in revenue and net margins as new competitors enter and price wars intensify.
  
• While vertical integration and ongoing investment in branded product development should support margin expansion, continued industry-wide supply-demand imbalances, oversupply and price declines-particularly as seen previously in Michigan-may erode gross profit and EBITDA margins, particularly if additional cultivation licenses are issued or illicit market activity persists.
  
• Even if advancements in e-commerce, delivery infrastructure and digital payments support operational efficiencies and future margin accretion, evolving compliance requirements and the entry of larger consumer packaged goods or pharmaceutical competitors in the event of federal legalization may increase costs and threaten TerrAscend's future earnings growth and product market share.

TerrAscend Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TerrAscend compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TerrAscend's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish 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 1.3% in 3 years.
• If TerrAscend's profit margin were to converge on the industry average, you could expect earnings to reach $4.1 million (and earnings per share of $0.01) by about August 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 bearish analyst cohort, the company would need to trade at a PE ratio of 136.5x on those 2028 earnings, up from -3.4x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 34.3x.
• Analysts expect the number of shares outstanding to grow by 5.05% 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

• The significant revenue decline and compressed gross margins that led TerrAscend to exit the Michigan market illustrate the risks of operating in oversupplied and poorly regulated markets, where persistent illicit competition and synthetic products can quickly erode profitability and overall revenue.
  
• Wholesale revenue fell year-over-year and was specifically flagged as declining in New Jersey, in part due to ongoing price compression and the rapid increase in retail licenses, threatening core revenue streams and long-term margin expansion.
  
• Expansion plans rely heavily on continuing strong performance in a small group of Northeastern states, which exposes TerrAscend to regulatory or competitive changes in these regions that could undermine both revenue and earnings stability if local dynamics shift.
  
• The company continues to generate net losses from continuing operations and has seen adjusted EBITDA and free cash flow decline year-over-year, indicating that even after restructuring, persistent cost pressures and thin margins could impact long-term earnings growth and shareholder value.
  
• Large-scale licensing expansions in key markets such as Maryland, driven by state social equity programs, mean that oversupply and increased competition could occur rapidly, leading to further price compression and threatening both gross margin and future net margin improvement.

Valuation

• The assumed bearish price target for TerrAscend is CA$1.5, which represents the lowest 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 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$2.25, and the most bearish reporting a price target of just CA$1.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $307.3 million, earnings will come to $4.1 million, and it would be trading on a PE ratio of 136.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$1.19, the bearish analyst price target of CA$1.5 is 20.7% 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.