Regulated Cannabis Shift And Retail Expansion Will Support Long Term Upside Potential

Catalysts

About Ascend Wellness Holdings

Ascend Wellness Holdings is a vertically integrated cannabis company focused on branded products and retail stores across key U.S. states.

What are the underlying business or industry changes driving this perspective?

• Consumer preference is steadily tilting toward regulated cannabis as an alternative to alcohol, supported by surveys showing broad adult acceptance. This trend can support long-term category growth and drive higher retail and wholesale revenue over time.
• The potential closure of the hemp product loophole would shift a meaningful portion of current unregulated sales into licensed channels. This could support pricing power and improve gross margins and earnings for established operators like Ascend.
• The densification plan to grow from 46 locations to about 60 within 12 months, with New Jersey as a central market and 13 active pipeline stores, is designed to push more product through owned stores. This can increase vertical mix, supporting revenue scale and retail margins.
• Ongoing expansion of higher value branded products, including Ozone, Simply Herb, High Wired, Effin and the upcoming Honor Roll line, together with more than 400 SKUs launched year to date, is intended to shift mix toward finished goods that carry stronger pricing. This can support gross margin and adjusted EBITDA.
• Automation across flower packing, vape filling, edibles and pre-rolls, plus tighter purchasing discipline for third-party products and a growing e-commerce and loyalty platform, is aimed at lowering cost of goods sold and SG&A per transaction. This can support net margin and cash generation even if revenue remains pressured.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ascend Wellness Holdings's revenue will grow by 5.7% annually over the next 3 years.
• Analysts are not forecasting that Ascend Wellness Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ascend Wellness Holdings's profit margin will increase from -16.7% to the average CA Personal Products industry of 13.0% in 3 years.
• If Ascend Wellness Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $79.6 million (and earnings per share of $0.41) by about January 2029, up from $-86.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.9x on those 2029 earnings, up from -1.8x today. This future PE is lower than the current PE for the CA Personal Products industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sector-wide price compression and heavy discounting by competitors, including promotions of up to 50% off menus, could keep pulling average basket sizes and transaction volumes down in key markets. This would pressure revenue and limit the benefit of current margin improvements on earnings.
• Regulatory delays at both the state and local level, such as slower than expected approvals in New Jersey or timing of additional Ohio licenses, may push out store openings and densification plans. This would hold back vertical mix, constrain top line growth and reduce the potential uplift to net margins.
• Federal reform and closure of the hemp loophole remain uncertain. If regulatory change is slower or less favorable than management anticipates, a large pool of unregulated sales could stay outside licensed channels, which would cap addressable demand for Ascend’s brands and limit long-term revenue and earnings growth.
• Growing store counts in core states, such as New Jersey adding 52 stores in a year and Illinois adding 20, suggest a long-term trend of rising competition that may keep same store sales under pressure. This could require ongoing promotional spending and potentially weigh on gross margin and adjusted EBITDA margin.
• While adjusted EBITDA and adjusted gross margin improved, operating cash flow was slightly negative in the quarter and interest payments of US$19.1 million are set to make cash generation volatile. If revenue softness persists or margins slip, liquidity could tighten over time, affecting the company’s ability to invest in new stores and automation and ultimately weighing on earnings and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $2.3 for Ascend Wellness Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $609.8 million, earnings will come to $79.6 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of $0.75, the analyst price target of $2.3 is 67.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.