How Lucrative is the Cannabis Industry?
Two decades ago, smoking marijuana for recreational purposes was more or less a societal taboo. Presently, however, this industry is one of the most rapidly expanding; attracting huge amounts of attention from investors all over the globe. Possessing the potential to take business away from the alcohol and pharmaceutical sectors, the Cannabis market has already grown to a current global value of $9.2 billion and is projected to reach an astounding $57 billion valuation by 2027. Trying to take advantage of the rising modern demand for CBD products as well as medical and recreational Cannabis, investors have set up numerous publicly traded Canadian-based stocks on the United States stock market. Some of the more successful examples include Cronos Group, Canopy Growth, Aurora Cannabis, and Innovative Industrial Properties.
However, regardless of such high perspectives for expansion, Marijuana stocks have one of the poorest Earnings Per Share Ratings. Furthermore, CBD prices have suffered a plunge: whereas last year, prices averaged $6,000, next year, prices are expected to fall below $1,000. The reason for this is that U.S. cannabis laws have not kept up with evolving public attitudes and medical research findings, since, on a federal level, cannabis has been prohibited since 1970.
Catering to the growing consumer demand for CBD products are those enterprises established in Canada, where recreational Marijuana has been legal since 2018. These corporations, trying to tap into the large U.S market demand for Cannabis products, must face challenging legal hurdles, incurring vast costs to follow government-set regulations for production and distribution of their goods.
More importantly, however, is that the direct result of the U.S Federal Marijuana intolerance is American brokers’ refusal to trade such companies and national banks’ refusals to lend them money. The reason for this is that the uncertainty of how to navigate the evolving legal landscape has prompted brokerages to bar existing clients from trading securities of marijuana businesses, or even turn away completely from prospective clients who have investments in the industry. Firms worry that they might be accused of facilitating the transfer of proceeds of a crime if they deal with marijuana-related businesses, securities or clients who profit from them. For example, Oppenheimer & Co. Inc. has put significant restrictions on marijuana-related securities that clients are allowed to trade, also refusing to sign on clients with income from a marijuana business.
As a result, most Cannabis firms are suffering slumps in the value of their equity and must rely heavily on issuing new shares to fund their deals and expansion plans, which is very difficult in light of brokers’ and banks’ discriminatory policies against them. As the existing as well as entering players burn through money to expand and jump through numerous regulatory hoops, the amount of capital raised in the cannabis industry is plummeting and large deals are falling through: MedMen Enterprises, for instance, pulled plans for an all-stock purchase of PharmaCann in October, in what would have been one of the largest deals in the cannabis sector.
Overall, although a growing social demand for medical and recreational Cannabis should be paving the way to a lucrative business in this sector, costly regulations and a lack of institutional enforcement guidance set by the most powerful nation in the world, is ultimately causing this promising sector to decline. It’s future, thus, is very uncertain.