U.S. Cannabis Collective: A State by State Overview

The Cowen Insight

Herein we provide a state-by-state desk reference for assessing the U.S. cannabis industry. We reiterate our 2026 U.S. legal cannabis TAM of $46.2 bn and lower our 2022 TAM estimate to $28.3 bn (prev. $29.1 bn) amid a deflationary backdrop and regulatory delays (NJ). We continue to believe full federal legalization will not occur in 2022, though there is a path for a modified SAFE Act to pass.

U.S. Cannabis Legalization

While we continue to believe federal legalization will not occur in 2022, we believe there is a path for a modified SAFE Act to pass. Price deflation, tough COVID stimulus comps and heavy retail ownership have been overhangs. However, MSOs are relatively de-risked with a series of adult-use transitions on the horizon providing a catalyst-rich environment.

We derive our U.S. legal TAM using a bottom-up approach based primarily on retail sales data from state governments and Headset. Our TAM includes 1Q22 reported retail sales data for 15 states which collectively account for ~84% ($23.6 bn) of our 2022 TAM. 10 were based on state-reported sales with the remaining five informed by Headset data.

Pricing Deflation Intensified

As we have seen from pricing data at both the retail level and the wholesale level, and as we have heard during 4Q21 MSO earnings, price deflation intensified in the second half of the year, albeit to varying degrees. In Michigan, wholesale prices have fallen ~54% YoY. This in turn caused cross-category price deflation at the retail level. In Nevada, wholesale prices are down 9%, as price deflation at the retail level seems to be isolated to just flower (-10%) and vape pens (-11%). As we reexamine our TAM, we expect price deflation to continue through 2022.

Key Catalysts to Watch

We are watching a few things in 2022:

  1. increased consolidation as MSOs leverage scale and vertical integration
  2. geographic expansion into nascent high-growth adult-use markets
  3. consumer behavior post-COVID and post-stimulus in a deflationary cannabis market but otherwise high inflationary backdrop
  4. continued migration from the illicit market into legal channels
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