Forward EV-to-sales multiple
Choosing a valuation multiple for cannabis stocks is a little challenging. Popular valuation multiples like PE aren’t very useful to compare stocks within the cannabis sector because most of the cannabis companies have negative earnings per share. Earnings are the input value in the PE multiple calculations, and negative earnings give a meaningless PE value. Thus, we’ll look at the EV-to-sales (enterprise value-to-sales) multiple.
In the above chart, the yellow line is the median of the 12 cannabis stocks. These 12 stocks include Canopy Growth (WEED), Aurora Cannabis (ACB), CannTrust (CTST), Aphria (APHA), and others. The current forward EV-to-sales valuation multiple for the cannabis industry was at a median of ~7.0x as of March 22. This figure rose from the average of 6.85x at the beginning of this month. This multiple has gradually increased since December when the multiple was at its lowest level at around 3.1x.
However, when we compare the current multiple of 7.0x, it was shy of its average of 8.0x over the past two years, which indicates that the cannabis industry is trading at nearly its fair valuation when compared to its historical average over the past two years. The valuation multiples reached a high of ~14.7x in October last year when sales of recreational cannabis began in Canada (HMMJ).