Three American cannabis stocks—Curaleaf Holdings (CURLF), Cresco Labs (CRLBF), and Harvest Health & Recreation (HRVSF)—have significant upside as the current legal marijuana market is expected to mature into a $40 billion market. Considering a number of significant factors, the stocks of these multi-state operators (MSOs) are selling at attractive valuations making them well positioned to outperform their Canadian rivals, according to analysis by Canaccord Genuity reported by Barron’s.

“As MSOs on average have access to a greater population base than in Canada, are able to operate more favorable vertically integrated operations in many states, and are closer to achieving (or have achieved) profitability compared to most Canadian LPs, we believe this valuation gap will eventually close,” wrote analysts at the global investment banking and wealth management firm.

What It Means for Investors

Based only on markets in states where marijuana is currently legal, whether for recreational or medical use, Canaccord’s analysts see total cannabis sales nearing $40 billion as the market reaches maturity. If the drug, which was recently legalized across Canada, reaches a similar status across the U.S., those sales could reach anywhere from $75 billion to $100 billion. With estimates like that, U.S. pot stocks are trading at big discounts compared to Canadian ones, even after the latter’s big selloff this year.

Rob Fagan, researcher at Canada’s GMP Securities, pegs the current sales opportunity for U.S. growers over the next three to four years at about $22 billion, compared to the C$5 billion sales opportunity for Canadian growers. Meanwhile, the aggregate market cap of the U.S. firms is somewhere between $20 billion and $25 billion compared to C$50 billion for the Canadian firms. That means U.S. pot stocks are trading at a price-to-sales ratio (P/S ratio) of around 1 while the Canadian stocks are trading at a multiple of 10.

But it’s not just the size of the market tilted in the favour of U.S. cannabis firms. Fagan also points to their superior economic model. He notes that most U.S. states allow companies, from producers to retailers, to sell directly to their customers and thus capture more of the value chain. Also, there are much fewer regulations on product form and advertising in the U.S. than in Canada.

Curaleaf, which solidified its spot as America’s leading cannabis operation this summer after acquiring the Midwest-based GR Companies, has the potential to expand its products across the nation. The company could see revenues pass $1.1 billion next year with an EBITDA margin of 34%, according to Fagan, per Barron’s.

Cresco Labs, which operates in both the retail and wholesale sides of the marijuana business, has been steadily expanding and is working to complete its acquisition of Origin House, one of the largest distributors in California. Fagan expects the company to generate around $735 million in revenues next year with an EBITDA margin of 34%. 

Harvest Health and Recreation, the leading participant in the medical-only Arizona market, has guided for a revenue range between $900 million and $1 billion, which includes planned acquisitions. Fagan proposes a slightly more conservative but still impressive estimate of $785 million with an EBITDA margin of 31%.

“Although the U.S. cannabis opportunity is still in a nascent stage that spans a relatively disaggregated landscape,” wrote Canaccord’s analysts, “we believe a number of U.S. MSOs have secured a strong first-mover advantage at the national level and are beginning to compete for meaningful market share in more than a dozen markets in the U.S.”

Looking Ahead

The prospect for American cannabis companies is without a doubt strong, especially if the drug is legalized in more states and eventually at the federal level. However, as the market grows and more competitors enter the market, companies will have to work even harder at differentiating their products and cutting costs just to survive.