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EV-to-EBITDA: Another Tool to Navigate the Cannabis Sector

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EV-to-EBITDA

In the previous parts of this series, we discussed the EV-to-sales (enterprise value-to-sales) multiple, which gave us a good understanding of where cannabis stocks such as Tilray (TLRY), Canopy Growth (CGC) (WEED), Aurora Cannabis (ACBFF), and others stand. However, investors often use multiple indicators to determine whether a stock is overvalued.

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What does it say?

Once again, the yellow line in the graph above represents pure-play Canadian companies, while the blue line represents a mix of Canadian and US pharmaceutical companies with exposure to cannabinoid drugs. The median EV-to-EBITDA multiple of pure Canadian cannabis companies (MJ) stood at 63.2x, which was significantly higher compared to levels since January 2017. The overall median including US pharma companies stood at 42x, which appeared to be near its previous peak at the beginning of this year.

The EV-to-EBITDA valuations lead to the same conclusion as EV-to-sales valuations, which is that cannabis industry valuations look stretched compared to the past levels, which have averaged 33.3x since January 2017. This essentially means that investors, who were willing to pay 33.3x the EBITDA for a cannabis stock on average, are now paying 63x for the same stock.

Next, we will look at individual companies that make up this median.

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