By Ketki Saxena
Investing.com -- In early 2019, cannabis capital markets were at an all-time high, with companies racing to grab as much land as possible and dominate the then-nascent industry. However, this focus on speculation and total addressable market was short-lived, as capital markets shifted their valuation metrics towards traditional business fundamentals like revenue, EBITDA, and earnings multiples.
Today's cannabis companies are being judged based on their operational competency and ability to generate cash flow instead of just aggregating licenses and expanding their territories. This shift started when the first cannabis stock bubble burst in late 2019 and early 2020, sending stocks to all-time lows.
At the time, While some large players like MedMen focused heavily on acquiring high-profile assets and boosting their brand through marketing without prioritizing profitability or efficiency, other companies had no choice but to put increased emphasis on these factors in order to survive in the evolving landscape.
Many businesses who staked their futures on limited license states saw those states' regulatory environments change as they shifted from medical use only to adult use. Moreover, highly valued states such as New York, New Jersey, and Massachusetts converted entirely into adult-use markets with no license caps at all - making it more challenging for smaller operators who cannot compete with the economies of scale achieved by their larger competitors.
The current climate forces operations toward focusing upon efficiency while cutting costs so businesses can remain cash-flow positive amid a prolonged downturn period.
The bottom line is that a company that cannot get to break-even cash flow no longer has the ability to raise investment capital and prop it up during lean times. Therefore, getting to break even likely comes from going deep enough into specific markets - not wide with only adequate performance in many markets.
Looking forward, while US Congressional leaders continue searching for a solution to the cannabis banking issue, there is little reason to believe that any laws regarding this matter will pass through a Democratic-controlled Senate and Republican-controlled House anytime soon. The current climate may be the new normal for some time, forcing companies within this space towards streamlining operations and focusing on healthy balance sheets or face genuine extinction events for their businesses.