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Cannabis Sector: Valuation Multiples Are on an Upward Trajectory

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Forward EV-to-sales multiple

Previously in this series, we discussed the importance of using valuation multiples. In this part, we’ll continue our discussion by looking at why valuation multiples are important. We’ll also discuss the cannabis sector’s trajectory.

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Multiples

The first valuation multiple we’ll discuss is the EV-to-sales multiple as a median for nine cannabis stocks (MJ) including Canopy Growth (WEED), Aurora Cannabis (ACB), Tilray (TLRY), Aphria (APHA), and others—as indicated in the footnote in the above chart.

As of February 22, the median valuation multiple for the nine stocks was 6.8x. In our previous update on February 8, the median valuation multiple was 5.35x. In December, the median valuation multiple was trading at 2.97x. In December, the overall cannabis sector and the market saw one of the worst months in 2018.

The stock market was in the “oversold” territory in December. The stock market provided an attractive opportunity for investors looking at the cannabis sector.

What to expect

We looked at the historical average of the multiples since January 2017 and compared it with the current levels. We found that the current forward EV-to-sales multiple of 6.8x was still trading at a discount to the historical average of 8.06x. There might be some room for upward momentum if the market thinks that a multiple of 8.06x is fair for the cannabis sector.

In the above discussion, we only looked at the median of the nine cannabis stocks. Next, we’ll discuss individual cannabis stocks.

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