Trulieve: Florida Is Becoming More And More Competitive

Summary

• Trulieve is facing increasing competition from local operators including many MSOs that are bigger and better-funded.
• Curaleaf and Surterra are two of the largest competitors to Trulieve and Liberty Health is also expanding aggressively.
• We think Trulieve has decent visibility to grow into its current valuation but increasing local competition and sole reliance on Florida remain the biggest risks to the stock.

Trulieve (otcpk:TCNNF) has dominated the Florida market since the beginning. The company built its billion-dollar empire single-handedly on its sprawling retail and cultivation footprint within the Sunshine State. However, just as Trulieve is having difficulties exporting its success to other states, we are seeing an incredible pick-up in the speed in which other competitors are expanding their footprint in the Florida market. We think Trulieve needs to prepare itself for an increasingly hostile competitive environment and we think margin compression is a possible near-term risk for investors to consider given the number of new entrants and their aggressive actions lately.

(All amounts in USD)

Florida Heating Up

Trulieve is facing increasing competition in its home state Florida as other competitors ramp up their expansion efforts. We will discuss the key competitors for Trulieve in Florida to illustrate the point that Trulieve is no longer the only dominant player in Florida. Moreover, Trulieve is facing competitions from MSOs that are much bigger and better funded which spells trouble for the company in the near to medium-term.

Curaleaf (otcpk:CURLF) opened its 24th dispensary in Florida on April 30 which is also the 44th dispensaries for the company overall. Curaleaf is the largest U.S. cannabis company by market cap now and it has ample capital to support its continued growth in Florida. We expect the company to continue its rampant expansion and reach the 30 store limit in no time. We think Curaleaf is a prime example of a well-capitalized MSO expanding in Florida to capture the strong growth in one of the fastest-growing medical markets.

Surterra Wellness (Private) is a private company in the U.S. cannabis market and holds another license in Florida. The private most recently raised $65 million Series C funding in July 2018 and raised a total of $200 million in 2018. The company has expanded into Massachusetts, Nevada, and Texas and is expanding its existing 300,000 sq ft of growing space into 500,000 sq ft. We think Surterra is in full-on expansion mode in Florida and is well-funded to continue its aggressive market acquisition strategy in 2019.

Liberty Health (OTCQX:LHSIF) is another local operator that has picked up its store expansions recently. The company just announced its 14th location and 230,000 sq ft of greenhouse space after its 360 Campus received approvals for new growing space. After the company was thrown into turmoil after short sellers implicated Liberty as part of their attack on Aphria (APHA), the company has taken steps to sever its ties with Aphria including firing its CEO and CFO. The company is currently looking for local-based management teams which would be a positive catalyst in the near-term.

Cresco Labs (otcqx:CRLBF) is another MSO that recently entered the Florida market through its $120 million acquisition of VidaCann. VidaCann operates 7 stores in Florida but expects to have 14 locations by the end of June 2019 and 20 locations by the end of 2019. With the help from cash-rich Cresco Labs, VidaCann will expand its 70,000 sq ft cultivation facility this year to support its continued expansion. We think VidaCann will become another top competitor in the Florida market with the backing of Cresco Labs.

Trulieve's Options

Trulieve holds an enviable position in Florida due to its laser focus on speed and execution. The company currently holds the largest footprint in the state and has recently won an appeal to open an additional 14 stores in Florida. With a total licensed location of 49 stores, Trulieve still has some runway to grow in the state. Other license holders will most likely follow Trulieve to ask for 14 more licenses. However, the table below clearly shows that competition is closing in on Trulieve's leadership position. Curaleaf and Surterra are the closest competitors with a footprint that rival Trulieve. More importantly, the speed at which new stores are being opened in Florida indicates a market that is getting crowded. We think Trulieve will start facing competition, likely for the first time, at its existing stores as there is only so much room for physical stores in attractive locations.

(Source: Marijuana Business Daily)

Trulieve has posted some impressive numbers during its first year as a public company. The company more than doubled its revenue within a year and posted strong margins as well. It reported $15 million of EBITDA in the last quarter which is one of the highest among cannabis companies. We think Trulieve has been very successful in rolling out its brand and managing its cost structure so far. However, for investors, the question is always whether the company could continue growing into its billion-dollar valuation.

(Public Financials)

Trulieve currently has a market cap of $1.5 billion and its annualized revenue and EBITDA based on last quarter was $145 million and $45 million. Trading at 10x EV/Revenue and 33x EV/EBITDA, we think Trulieve has to grow significantly to live up to its current valuations. With the license to open 45 stores, we think there are enough runway to at least double Trulieve's current financial performance. However, the path to profitability is somewhat clouded by the increasing competition we are seeing across the board and any deterioration in margins could result in sharp reactions from the market as investors re-evaluate their medium-term outlook.

Looking Ahead

Trulieve has built one of the most profitable and mature businesses in the U.S. cannabis industry. However, its success has been confined within the state of Florida with little progress observed outside the state so far. While we think Trulieve's profitability has reached a mature level and there is clear visibility into its near-term growth runway, we think the increasing competitive pressures could potentially result in a discount in its valuation. For investors, it is important to watch for any sign of competitive pressure in Trulieve's profitability in the near-term as investors enter similar geographies. While most of the competitors remain small in Florida, we think the pace of expansion could cause concerns for Trulieve investors while they await more aggressive actions by the management to diversify into other states.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.