Fundamentals Key to Canna 🗝️

Key Investments are in the cannabis patch.

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Fundamentals: Focus on the Controllables

While the cannabis industry’s consumer metrics (e.g. sales and usage rates) have shown impressive growth, the financial markets have told a more sobering story in recent years.

After a period of exuberance in the late 2010s and a resurgence of investor optimism in 2020 - 2021, the cannabis sector has experienced a marked contraction in valuations and a tightening of available capital.

This reset has been driven by a combination of regulatory disappointments, oversupply and pricing pressures in mature markets, and broader macroeconomic factors - and it has significant implications for investors and operators alike.

The silver lining of the industry shakeout that post-2021 is the normalization of valuations and the potential for more attractive entry points. Prior to 2021, many cannabis companies were priced on lofty future projections rather than fundamentals, a classic speculative bubble scenario.

That bubble has essentially burst. Today, valuations are more grounded: analysts note that cannabis company pricing is increasingly tied to actual earnings potential and tangible assets (e.g. licenses, facilities) rather than just growth stories.

As the CFA Institute observed, “the hype and speculative froth of 2018 and early 2021 has burned off, and the market is right sizing: valuations are more reflective of actual profitability” (2). In practical terms, this means a savvy investor can find companies with strong revenues or assets trading at historically low multiples due to the overall sector malaise.

For investors, this phase of the market presents both risk and opportunity: the overall sector is undoubtedly challenged in the present, but history suggests that periods of capital scarcity often set the stage for the next phase of disciplined growth and outsized returns for the strongest participants.

“Focus on the controllables” translates to three non negotiables:

1. First, information rights and transparency sufficient to test claims against data.

2. Second, structures that protect capital – tailored securities, covenants that matter, and upside participation proportionate to risk.

3. Third, KPI guardrails that make drift obvious early: cash days on hand, AR/AP turns, inventory health by state and by channel, and a maturity map that prevents calendar driven crises. These are the mechanisms that convert policy tailwinds into durable equity value when they arrive, and that protect capital if they do not.

Facing the dual reality of robust long-term growth potential but difficult near-term conditions, cannabis investors in 2025 must emphasize fundamental analysis and strategic discipline. Unlike the boom periods where speculation alone could drive returns, the current environment rewards those who take a carefully selective, value-oriented approach.

At KEY, several core principles stand out for investing amid the uncertainty:

1. Prioritize FCF Positivity and Resilience

In a cash-constrained environment, profitable or near-profitable operators stand out. Investors must focus on strong gross margins, clean balance sheets, and sound unit economics. Companies with FCF positivity, predictable EBITDA and efficient cost structures, especially in limited-license states, are best positioned to endure price compression and regulatory inertia.

2. Back Proven Operators

The cannabis market has punished poor governance. Investors should back teams with turnaround experience and a history of strong execution. Great management is the biggest hedge against market and regulatory volatility.

3. Invest in Moats

Even in a commoditized market, companies with competitive advantages (ex. exclusive licenses, entrenched B2B relationships or supply chain efficiencies) command staying power. These moats matter more than ever as capital concentrates around fewer winners.

4. Don’t Overlook Ancillary Plays

Non-plant-touching businesses (ex. software, equipment, logistics) can scale faster, face fewer legal hurdles, and still benefit from overall industry growth. In a fragmented market, “picks-and-shovels” plays often offer better margin profiles and lower regulatory risk.

5. Stay Long-Term Oriented

Despite setbacks, U.S. legal cannabis sales are growing steadily and are expected to surpass $45B by 2028(3). Rescheduling and banking reform could unlock major upside as today’s downcycle offers entry points at compressed valuations. Investors with patience and discipline can position for the next wave of industry expansion.

In summary, investing in cannabis amid uncertainty means being both prudent and opportunistic. The lessons of the past few years have reinforced that this industry, while fast-growing, is not immune to the laws of economics and finance. The dramatic boom-and-bust cycle has, in effect, matured the sector by shaking out weak hands and instilling more rational expectations.

For investors, those who remain (or newly enter) must act more like classic value investors or venture capitalists in a challenging sector – conducting rigorous due diligence, insisting on margin of safety, and adding genuine strategic value to their portfolio companies.

Those who do so will be best positioned to capitalize on the eventual upswing, as cannabis continues its march from the margins to the mainstream of commerce.

This is Third-Party content and does not reflect (or not not reflect) the views of Cannabis Confidential or CB1 Capital.