In the earlier parts of this series, we discussed EV-to-sales valuation multiples for some of the cannabis stocks (SEED). However, to get a better understanding of whether the cannabis sector is in the overbought or oversold territory, we’ll look at more than one valuation multiple. In this article, we’ll discuss how the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) has changed over the last month.
The above chart shows the median EV-to-EBITDA multiple for nine cannabis companies based on fiscal 2019 EBITDA estimates. The EV-to-EBITDA multiple for the cannabis sector increased slightly to 36.3x as of July 10 from 35.4x a month ago. EBITDA is a useful measure, as it indicates the core profitability of a company after all the costs. The exclusion of depreciation and amortization also make the metric capital-structure-neutral, which makes it easier to compare companies with varying leverage.
The EV-to-EBITDA multiple is currently at 36.3x, which appears to be on the higher side. However, bear in mind that the above chart only takes into account fiscal 2019 EBITDA, which would just be the first year of cannabis sales. So, a higher multiple may indicate that the market may be pricing in growth beyond 2019 for companies including Canopy Growth (WEED), Aurora Cannabis (ACB) (ACBFF), Aphria (APHQF), and others.
Next, we’ll compare the current EV-to-EBITDA level of individual cannabis companies.