Expanding German Medical Cannabis And Cabana Club Will Build Opportunities

Key Takeaways

• Strategic expansion in the German market and leveraging Canadian connections may boost future revenue.
  
• Growth in loyalty programs and data platforms aims to increase customer retention and provide strong high-margin revenue streams.
  
• Challenges from illicit market growth, regulatory uncertainties, strained financials, and increased competition could impact High Tide's growth, profitability, and market position.

Catalysts

Engages in the cannabis retail business in Canada, the United States, and internationally.

• High Tide's plan to expand its presence in the German medical cannabis market could drive future revenue growth, supported by leveraging existing relationships with Canadian producers.
  
• The expansion of the Cabana Club loyalty program with a target to reach 2.5 million members is expected to enhance customer retention and increase revenue per customer, impacting overall revenue positively.
  
• Opening 20 to 30 new stores in 2025 and a strategy focused on selecting prime real estate locations are expected to support long-term revenue growth and improve earnings.
  
• The White Label strategy, capitalizing on its Queen of Bud brand, is anticipated to enhance gross margins over time as product availability increases to meet demand.
  
• Continued growth in the Cabanalytics data and advertising platforms could bolster non-merchandise revenue, providing an additional high-margin revenue stream.

High Tide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming High Tide's revenue will grow by 13.0% annually over the next 3 years.
• Analysts are not forecasting that High Tide will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate High Tide's profit margin will increase from -1.3% to the average CA Pharmaceuticals industry of 1.1% in 3 years.
• If High Tide's profit margin were to converge on the industry average, you could expect earnings to reach CA$8.1 million (and earnings per share of CA$0.1) by about April 2028, up from CA$-6.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 81.2x on those 2028 earnings, up from -39.4x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 1.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

High Tide Future Earnings Per Share Growth

Risks

• High Tide's same-store sales growth, while impressive in the past, faces potential challenges from a resurgence in the illicit market, which may impact future revenues and market share.
  
• The company's expansion into the German medical cannabis market faces uncertainty due to changing political climates and regulatory environments, potentially impacting projected international revenues and market position.
  
• The decision to not pursue the Purecan transaction as planned raises concerns about access to strategic partnerships and markets, which could affect growth prospects and future earnings in international markets.
  
• High Tide's rapid pace of new store openings strains working capital and free cash flow, given the upfront costs and longer ramp-up times due to market saturation, which could affect margins and financial flexibility.
  
• Elevated competition and price compression in core markets could strain gross margins further, challenging profitability despite revenue growth and potentially impacting net earnings.

Valuation

• The analysts have a consensus price target of CA$6.562 for High Tide based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$8.5, and the most bearish reporting a price target of just CA$5.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$773.7 million, earnings will come to CA$8.1 million, and it would be trading on a PE ratio of 81.2x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of CA$3.31, the analyst price target of CA$6.56 is 49.6% 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.