With regulatory changes sweeping across both Canadian and US markets, Atrium Research analysts say now is the right time to take a fresh look at cannabis stocks.
Weighing on sentiment is a combination of regulatory uncertainty, slowing growth, pricing headwinds, and a lack of institutional capital in the industry.
Atrium’s analysts noted that while investor confidence is low, there has been a shift in the sector with many businesses resuming revenue growth and expanding margins while trading at single-digit multiples.
“We believe there are solid names in the sector that have formidable growth and expanding margins albeit the tough pricing environment,” analysts wrote.
Federal regulatory changes in Canada
Recent regulatory changes in Canada's cannabis market have included significant updates aimed at easing operational challenges and promoting growth, Atrium’s analysts highlighted.
Health Canada increased the public possession limit for cannabis beverages from 2.1L to 17.1L, allowing consumers to carry up to 48 standard-sized cans.
Licensing reforms now permit micro-cultivators to expand their growing area from 200m² to 800m² and micro-processors to increase production capacity from 600 kg to 2,400 kg annually.
Regulations were also adjusted to allow ethyl alcohol in inhaled extracts up to 7.5g and removed the 1-gram cap on pre-rolls.
Further, packaging rules were relaxed to allow transparent containers and cut-out windows for specific products, while security requirements were reduced by eliminating mandatory on-site personnel and lowering surveillance obligations.
These changes are expected to save the industry an estimated C$18 million in compliance costs and C$24 million in administrative expenses, the analysts wrote.
Provincial updates
British Columbia (BC) repealed its window-covering requirement for cannabis stores, enhancing storefront visibility for improved safety. The province also launched the Producer Retail Store license, allowing licensed producers to sell cannabis directly from their facilities. BC is considering licensed consumption spaces to support tourism and hospitality.
Ontario doubled its retail store cap from 75 to 150 to curb illicit sales and encourage growth. The province also mandated a new Point-of-Sale Data Reporting Platform to streamline retailer reporting.
Alberta has allowed cannabis producers to offer product samples to retailers, introduced self-attestation for age-gating, and expanded signage permissions.
Additionally, Saskatchewan has eased ID-check requirements for cannabis purchases and updated ownership disclosure rules to simplify licensing.
Consolidation continues
The consolidation of Canada’s cannabis market continues, with larger firms capitalizing on distressed operators amid higher borrowing costs and compressed revenues.
“We expect M&A activity to continue to be strong as the larger and better-capitalized firms take advantage of the smaller distressed firms,” Atrium’s analysts wrote.
Meanwhile, pricing pressure remains a challenge due to oversupply, retail competition, and pressure from the illicit market.
Following legalization, producers overestimated demand, leading to excess inventory and falling prices. “Retail competition, especially in provinces like Ontario, has further pushed prices down as stores compete for customers,” analysts added.
Consumer demand has increasingly shifted toward higher-THC and premium products, further driving down prices for lower-quality cannabis.
The average retail price per gram has dropped from C$8.43 before legalization to C$3.96 by early 2025.
Rescheduling uncertainty in the US
The US cannabis industry is navigating a complex landscape of regulatory uncertainty, fueled by changing federal policies, the analysts added.
The Biden administration initiated a review to reclassify cannabis from Schedule I to Schedule III in 2023, but this move is uncertain under Trump's administration.
The Secure and Fair Enforcement Regulation (SAFER) Banking Act, designed to protect financial institutions working with cannabis businesses, was approved by the Senate Banking Committee but has yet to become law.
The 2023 Farm Bill, extended to September 2025, maintains existing hemp regulations but may introduce stricter THC limits in future revisions, impacting hemp-derived product sales.
State-level developments
New York launched adult-use cannabis sales in December 2022, while Minnesota legalized recreational use in 2023.
Ohio voters approved recreational cannabis in November 2023, with licensed sales starting in August 2024.
Delaware legalized adult-use cannabis in April 2023, with regulated sales expected in 2025.
California introduced stricter testing standards for heavy metals in January 2023, and Colorado updated its hemp regulations in July 2023.
Florida expanded its medical marijuana program to include edibles in August 2023. Tennessee, Wisconsin, and West Virginia are currently exploring cannabis regulation changes.
Illegal supply remains major challenge
The illegal cannabis market continues to pose a major challenge for US operators, accounting for an estimated 75% of the nation’s cannabis sales.
In 2024, authorities seized approximately $200 million worth of illicit cannabis, while legal cannabis sales totaled about $4.27 billion.
Illicit operators often outcompete licensed businesses by bypassing taxes and fees, and the analysts expect this trend to persist.
As a result of these factors, multi-state operators (MSOs) in the US have experienced slower growth than Canadian firms, the analysts noted.
US sales growth is expected to average just 2% in 2024, constrained by complex state regulations and pricing pressure. However, MSOs are projected to see improved performance with an estimated 7% compound annual growth rate (CAGR) from 2022 to 2026 as more states legalize recreational use.
“While it may appear that the MSOs are much cheaper than their Canadian counterparts, we have to remember that MSOs are paying significantly more taxes because of [tax code] 280E, as such none of the MSOs are profitable on a price-to-earnings ratio basis aside from Green Thumb Industries Inc. (CSE:GTII, OTCQX:GTBIF),” analysts wrote.
“Thus, EBITDA may not be the most accurate figure for investors to look at, depending on their view on 280E being removed.”
Cannabis stocks on Atrium’s radar
- Cannara Biotech (TSXV:LOVE) is a Quebec-based cannabis company with strong revenue growth, benefiting from low-cost production in the province and maintaining a stable share count despite its expansion efforts.
- Simply Solventless Concentrates (TSX-V:HASH) has achieved rapid growth through strategic acquisitions and holds a strong position in the premium cannabis concentrates market.
- MTL Cannabis (CSE:MTLC) has delivered impressive sales growth, expanded margins, and offers a diverse product portfolio that appeals to both premium and value-conscious consumers.
- Rubicon Organics Inc. (TSX-V:ROMJ, OTCQX:ROMJF) specializes in premium organic cannabis products, is expanding production capacity, and trades at a discounted valuation relative to peers.
- Avant Brands (TSX:AVNT, OTCQX:AVTBF) has strengthened its position through strategic acquisitions that expanded production capacity while maintaining strong growth potential at an attractive valuation.
- Grown Rogue International (CSE:GRIN) is a multi-state cannabis operator with premium products and a strong market presence, recently expanding into New Jersey to support continued growth.
- Jushi Holdings Inc (CSE:JUSH, OTCQX:JUSHF) is a vertically integrated cannabis company with a strong retail network and plans to expand its dispensary footprint to drive future growth.
- Planet 13 Holdings Inc (CSE:PLTH, OTCQX:PLNH) is a multi-state cannabis company known for its massive Las Vegas SuperStore and strong brand portfolio, positioning it for continued sales growth.
- Glass House Brands (OTCQX:GLASF) is a California-based cannabis company with the state's largest greenhouse cultivation facility, supporting strong margin expansion and premium product offerings.