Touted to become a $146 billion sector in less than a decade, the cannabis industry has attracted the likes of many investors. However, analysts are wary, advising investors to not rush into buying stocks of the publicly traded companies.
Since the legalization of recreational cannabis in Canada, there have been several cannabis companies that are reporting high revenue, but their share prices continue to fall. According to trade, though some companies have observed their losses to shrink, not one has been profitable yet, and it would take considerable time before turning in a profit.
Over the span of 3 days, three major companies of North America, Tilray, Aurora Cannabis, and Canopy growth reported high revenue growth; however, all their shares fell by at least 10 percent, stating that even with high sales, the companies have been steadily losing money.
Scott Willis, head of research at Grizzle, a New York-based investment research company who studies cannabis companies states, “Costs are still going up faster than revenue, they haven’t turned the corner.”
Are supply shortages to be blamed?
Incessant shortages along with ineffective delivery systems have plagued the cannabis industry from start. People who purchased online had to wait for almost 2 weeks for their product to be delivered.
Alan Brochstein, a portfolio manager and author of the 420 Investor newsletter, exclaims that “Canadian producers have been better at growing their bank accounts than growing cannabis!” In other words, pot companies haven’t been able to meet the demand-supply and are struggling to increase growth.
This situation is further affected by the falling rate of cost per gram. With the government procuring products at bulk and setting rates, the prices are markedly low and may decline further. The average per gram price of Tilray fell from $7.53 to $6.21.
Brochstein marks the irony of the situation where although it had been a great year with the legalization of marijuana, it had also been equally disappointing.
Huge earnings for investors at start
Willis stated that Investors who had initially invested in stocks had huge earnings but reminds that it may not be the case for investors who are looking to invest now. They should wait it out as prices are expected to fall off by 60 percent from their price before legalization.
According to analysts, it would be months for Canada’s pot companies for their production rate to meet up with the demand rate and see a profit. Until which time, cannabis companies would be spending more, especially on constructing large greenhouses suited for pot growth which can take both time and money.
They are also still left on the lurch on how to market their products. Edibles which is expected to be a $4 billion industry worldwide according to ArcView market research, will be legal only by July 2019.
It hasn’t helped that the black market still continues have a strong hold over the cannabis market, which combined with cheap prices, swift delivery, and more drug choices, have given it an upper hand. And with certain missteps taken by the government, it has further augmented the situation.
Stocks may also further decline after the release of cannabis sales figures by the government at the end of the year. He states that the official numbers may not be as strong as one hoped.
However, even with the setbacks, both Willis and Brochstein reinstate that investing in cannabis on the long-term could be fruitful, which is also supported by numbers from the Grand View Research stating that the global pot market will be worth $146 billion by 2025.
The setbacks across the way are mainly due to the novelty of the industry with Canada being the first G7 nation to legalize the drug. And though Canada, with a population of 35 million has a decent market hold, it is still small compared to other countries; and in the future, with other nations opening up to legalize weed, things will turn for the better.
Even if it takes years to happen, Canada’s step into legalizing weeding could be seen as a major factor pushing other countries in the right direction. Now with the UK doing a volte-face, from not allowing medical prescription of cannabis to allowing them in a span of 3 months, Willis is optimistic that more countries will follow.
Investing for the long-term
Willis advises that when one intends to look for a long-term opportunity, it is preferable to wait till the second half of 2019 before investing as valuation rates are still high, with companies trading between 20 – 55 times their earning. It may gradually drop and go down to 10-14 times their earning which equates it with the tobacco and alcohol industry.
For investors who are looking to invest in the cannabis industry right away, one can consider options in the US which has a less regulated market than Canada.
With fewer restrictions, American companies can market their wares and have more options to sell. Though smaller and ambiguous than their Canadian counterparts, certain companies operating in several states are trading at much lower valuations like MedMen or iAnthus which have registered a positive net rate by the year-end.
In the current scenario, the best bet in Canada would be to look for low-cost producers like Aphria, who are closer to generating net income and make a profit by the second quarter of 2019, or Tilray, which had the smallest net loss among the three major players.
But Willis concludes that for investors, it would be best to be patient and wait for the potential of cannabis huge market to play out.
