Cannabis sector: bubble or the main chance?
a.dzybalov_2819's picture

On October 17, 2018 the recreational use of marijuana became legal and I understood that the world will never be the same. Discarding the ethical aspect, in the sense that in my home country all use of cannabis is prohibited, I has begun to consider cannabis sector as interesting to invest due to its high growth opportunities. I think that many people would like to turn back time to the past 15 years and buy Apple stocks. Imagine how much you would earn if you invested $2,000 in Apple, for example, in 2003 (average stock price = $1.3). Unfortunately people haven’t invented a time machine. However, we have a chance to make money in the new sector.

 

Cannabis sector in Canada

Canada became the first country from G-7 and the second in the world after Uruguay, which legalized the recreational use of marijuana. In my view, until all US states legalize marijuana for recreational use, Canada will be the main near term driver in the cannabis industry. Therefore I’m going to concentrate only on the Canadian market.

Absolutely, the legalization of cannabis for recreational use will significantly increase the size of Canadian market. According to the Statistics Canada the volume demand for marijuana, including illegal market, amounted to 773 tons with an average price per gram of $7.2. Taking into account the complexity of assessment of the illicit market, which in my view is actually larger, the market size of cannabis was equal to $5.6 bln in 2017. And sales in the medical cannabis market accounted only for 11% of the total market. This gives us a good reason to believe that after legalizing marijuana for recreational use the market size will show stable growth in the nearest future.

Cannabis users will stop buying cannabis on the black market, that will allow producers to increase its production capacity, expand distribution channels and implement new technologies. I assume upcoming reduction in average price per gram of cannabis due to the removal of the illegal risk premium, however, I think that positive effect from post-legalization activity will offset decrease in prices. In addition, I expect that legalization will lead to new value-added products, which provide new sales opportunities for producers.

Turning to the increase in capacities. Many major players in the cannabis sector such as Canopy Growth Corp, Aurora Cannabis Inc, Aphria Inc, Cronos Group Inc, HEXO Corp, etc, announced their plans to significantly increase its capacity in the near-term. Also in 2019-2020 we will see a new player The Green Organic Dutchman, which cultivation facilities are under construction, but I think TGOD will provide competition for market majors. Therefore the most interesting in the cannabis sector we will see in the nearest future.

 

What should we expect from the sector in the future?

As I mentioned above there will be rapid growth of the market size against the backdrop of the expansion capacities by the cannabis producers, stable growth of consumption, creation of new value-added products, as well as new technologies implementation.

New technologies will open new opportunities for the cannabis producers. Currently some producers have direct entry into a beverage industry. For instance, Valens Groworks Corp has the exclusive Canadian rights to Tarukinos’s SoRSE technology, which transforms cannabis oil into water-comparable forms. This gives Valens an opportunity to add cannabis to products including beverages without any marijuana taste or smell.

In my view such technologies are able to revolutionize the beverage industry and compete with alcoholic products. Canada is the big beer and wine market, therefore cannabis infused drinks will compete for market share. Cannabis infused drinks are not legal right now, but the Liberal government is going to consider its legalization in 2019.

After legalizing marijuana for recreational use we witnessed fall in stock prices of all companies in the sector. The first reaction of the market was that cannabis sector is another stock market bubble and stock prices reached its maximum. I partially agreed that the market was overheated and most speculators really closed positions after announcement of legalization of recreational cannabis.

However, look at the current stock prices. Do you really think that stock values of the cannabis producers reached its limit? I believe that we are witnessing of a new sector formation that has great opportunities for development and growth. In the short term I expect continued volatility and assume possible market consolidation through M&A deals. Anyway I’m sure that in the long run investments in the marijuana sector will show solid return.