Marijuana has always been a hot button topic around the globe. It’s legal status and use have come into question over the past several years, as many countries consider decriminalizing, or even legalizing the drug altogether.
As the marijuana landscape changes, so does the opportunity for investment in this burgeoning industry. Marijuana presents a untapped market in many ways, and one in which investors have been previously hesitant to put their money. So, is marijuana a good investment? Or is it still too risky to consider a viable option for your portfolio?
It is no secret that marijuana has grown significantly in popularity over the past decade as regulation on the drug eases out of style around the globe. Some experts estimate that the legal marijuana industry, including both recreational and medicinal marijuana, could grow as big as $146 billion by 2025. In the United States alone, the marijuana industry added 64,389 jobs in 2018, making it one of the fastest growing labor markets in the country.
In many countries marijuana legalization is rapidly growing. Countries like Canada and Uruguay have already legalized the drug for recreational use on a national level, and there are signs that other countries may follow suit. In some countries the drug is legalized for medical use while its recreational status is still pending. Meanwhile, countries like Spain, Peru, and South Africa rarely, if ever, prosecute citizens for marijuana use.
If legalization continues to expand across the world, there becomes significant opportunity for investors to capture the new growth of this industry.
A marijuana industry landscape
When thinking about the marijuana industry, it is easy to only think about consumer sale of marijuana products. Yet, the legalization of marijuana has created a web of businesses and industries which are growing exponentially. Everything from farming to healthcare businesses are being affected by this growing industry.
Let’s examine three different business areas of marijuana and examples of each, which could lead the marijuana industry into the next generation.
Marijuana Cultivation and Production – Canopy Growth Corp. (CGC)
It takes a lot of work to get marijuana into the hands of consumers. The process first starts with the growing and production of large quantities of the plant, which is not much different than traditional production farming as it exists today. Then, the plant must be harvested and cured so that it is ready for sale. The Canadian-based Canopy Growth Corp. grows marijuana in its plant form, as well as produces all other forms of the drug, including concentrates, oils, hemps, and softgel capsules.
The company’s stock has seen a massive spike in the 4-years since it went for an IPO. After going public for less than $2 per share, Canopy currently trades above $44. Therefore, a $5,000 investment in Canopy Growth during the time of its IPO would now be worth over $110,000. Not bad for a 4-year return on investment.
Pharmaceutical – GW Pharmaceuticals (GWPH)
While many people are focusing on the impact legalization has on recreational marijuana usage, there is a lot of potential in the pharmaceutical use of the drug. GW Pharmaceuticals works on the development of prescription medicines derived from the cannabis plant. The company’s biggest discovery to date is Epidiolex, which is used to treat epilepsies in children, spasms, and more. Through its licensing agreements with healthcare providers, GW has expanded its market reach to outside of its base in the United Kingdom to the rest of Europe, the United States, Canada, and Asia.
At an IPO price of $8.90, it took less than 1-year for GWPH to begin rocketing up in price. Today, the company’s share price sits at about $175, giving investors who have held until now an almost 20x return on their investment.
Dispensary Operator – Curaleaf Holdings, Inc. (CURLF)
Once marijuana is produced, it needs to get into the hands of consumers. This is done via marijuana dispensaries. These dispensaries serve as retail outlets for the general public to purchase recreational marijuana, and for medical patients to purchase cannabis used for medicinal purposes.
Operating 44 dispensaries across 12 states, Curaleaf is one of the biggest dispensary networks in the United States. It’s product offerings include flowers, vapes and oils, concentrates, pre-rolls, topical lotions, tinctures, and more. At the same time, Curaleaf also provides customers with an array of hemp-based CBD products which provide some of the benefits of marijuana without the THC-induced high.
At the time, the Curaleaf IPO was the largest ever marijuana stock public offering. The company’s valuation at its IPO price came in at $4.5 billion. However, things didn’t go well for the company’s stock right off the bat, and it’s share price plummeted by more than half of its IPO price, down to just above $4 per share. It seems investors thought the company was overvalued at the time of its offering. Still, 2019 has been kind to Curaleaf, as its share price has managed to pull itself up as high as $11 per share and provide investors reason for hope in the future.
It’s not all gold for marijuana
While marijuana is getting a significant amount of attention, it still has a long way to go before it is seen as a truly viable industry. For one, even though some countries have legalized the drug outright, the majority of nations around the world still don’t allow for a legalized marijuana industry. Without support from a government level, marijuana-based businesses have more trouble than traditional businesses in gaining access to financial services such as banking and credit, making it difficult for them to grow and sustain themselves over time.
Because marijuana is a hot-button topic it is subject to the whims of local and national elections. If more government seats are held by conservative candidates it could slow down the momentum for the nationwide legalization of marijuana. In many ways, the growth of the industry is not necessarily dependent on supply and demand, but politics and legalization status.
With there being no universal regulatory guidance, product safety is another major concern for cannabis. In the US, product safety changes from state to state, and product warnings may not be enough to limit the liability incurred by marijuana manufacturers who produce harmful or defective products. In fact, there are already 24 different product safety guidelines for medical marijuana in the US alone, each with different standards for product safety. This is made all the more complicated by the fact that it is extremely difficult to measure the amount of THC (the psychoactive compound found in cannabis) in alternative products like edibles, making it nearly impossible for a user to know exactly how much of the compound they are ingesting.
Additionally, while there are proven medicinal uses for the drug, it still has significant downsides that could outweigh its benefits. Alex Berenson, author of “Tell Your Children: The Truth About Marijuana, Mental Illness, and Violence”, sees these drawbacks as potentially catastrophic. “There is a considerable body of evidence that marijuana use can produce psychosis,” Berenson says. ”Temporary psychosis caused by marijuana is serious because it causes hallucinations, delusions and paranoid thoughts severe enough to land people in the emergency room.”
Be open, but heed caution
Yes, marijuana is an exciting new industry with significant potential. But smart investors know that hype and headlines does not always equal success. This is why it’s important to heed caution when looking at the marijuana industry for potential investment. Doing so could save you from a bad investment decision down the line.
At the same time, the global view of marijuana is that it is not only a drug that has significant benefits in the pharmaceutical world, but that it is a drug that should be legalized, or at the very least, decriminalized for the world to use freely. We are still on the ground floor of a potential marijuana revolution that could make investors a lot of money if they jump on the right train at the right time.
Yet, even if marijuana becomes ubiquitous across the globe, there is nothing stopping major companies from getting in on the action. After all, marijuana is simply a crop that can be produced at mass quantities if the monetary benefit is great enough. This could create a change in major cigarette producers like Altria and Philip Morris to shift into the marijuana business, pushing out smaller producers in the process. The same can be said in the pharmaceutical industry, where major companies like Novartis AG are already creating strategic partnerships in the industry.
As always, do you due diligence on any company before investing, and understand the risks inherent in putting your money in an untested market. Marijuana could be the next gold rush, but it could also be the next overhyped industry to fall by the wayside. Right now, it’s too soon to tell.
Disclaimer: The information in the post is for educational purposes only, and should not be taken as investment advice. Please consult an investment professional before making any financial decisions.