The marijuana industry has been making history at a pretty steady pace thus far in 2018. So far this year, we’ve witnessed:
- Vermont become the first state to legalize recreational marijuana entirely through the legislative process.
- The very first approval of a cannabis-derived drug by the U.S. Food and Drug Administration.
- The six largest cannabis deals in history.
- The first Canadian pot stock to go the initial public offering route on a major U.S. exchange.
- Five Canadian-listed marijuana stocks uplist to reputable U.S. exchanges.
- Gallup report the highest-ever support for legalizing recreational pot.
- The lifting of a nine-decade prohibition of recreational marijuana use in Canada.
This last event — waving the green flag on adult-use pot — is by far the highlight of 2018. On Oct. 17, Canada became the first industrialized country in the world, and only the second country overall, aside from Uruguay, to legalize adult-use marijuana. In a few years, when the industry is running on all cylinders, Wall Street has suggested that it could bring a $5 billion windfall (or more) to the legal cannabis industry.
Legal cannabis is a bigger deal than you probably realize
But, truth be told, there are much bigger opportunities out there for the legal weed industry than just Canada. For example, if the U.S. federal government were to change its tune on cannabis, the U.S. would almost certainly become the most lucrative marijuana market in the world. In fact, California alone has a higher peak sales potential than all of Canada, and that’s even with the federal government maintaining its Schedule I classification on the drug.
Just how big an opportunity is out there for the industry, marijuana stocks, and investors? According to a newly released report from the Bank of Montreal (NYSE:BMO), the global cannabis market could be worth $194 billion in seven years.
Contingent to this aggressive estimate is the belief from analysts at Bank of Montreal that additional countries will fully legalize marijuana, including the United States and many (if not all) European Union countries. If all 28 countries in the EU were to give marijuana the green light, it could lead to a $30 billion medical marijuana market and a robust $68 billion adult-use market. In the U.S., legalization would mean up to $19 billion in annual medical pot sales and a further $49 billion from the recreational side of the equation.
Which pot stocks could benefit?
If these pie-in-the-sky estimates from Bank of Montreal for the cannabis industry prove accurate, the next question for investors should be: Which companies are the likeliest to benefit?
Though we still don’t know that answer with any certainty since the Canadian pot industry is still in the early stages of maturation, companies with a knack for international expansion and key partnerships are the most likely to succeed.
The current pot stock that best fits this definition is Canopy Growth Corp. (NYSE:CGC). In mid-August, Canopy Growth announced that Corona and Modelo beer maker Constellation Brands(NYSE:STZ) would be investing $4 billion in the company, marking Constellation’s third investment since October 2017. Constellation, which now owns approximately 37% of Canopy Growth, brings deep pockets and invaluable marketing know-how to the table should Canopy push into new overseas markets.
Not to mention, it doesn’t hurt one bit that Canopy Growth now has more than $4 billion in cash on hand to develop its international infrastructure and acquire complementary businesses. With a presence in 11 countries, Canopy Growth’s brands could easily expand into new markets in the years to come.
Aurora Cannabis (NYSE:ACB) could benefit as well, although it has more hurdles to overcome than Canopy Growth. Aurora’s advantages are twofold. First, it already has a presence in 18 total markets across five continents. That would, presumably, position Aurora Cannabis for success if new countries wave the green flag on medical and/or recreational pot. Secondly, it’s on track to be the largest producer by annual yield in Canada, with a very good chance to easily surpass 600,000 kilograms.
On the other hand, Aurora Cannabis lacks a major partner, and it’s still years from running on all cylinders. Its fourth-quarter operating results suggested that it’ll be producing at a run rate of 100,000 kilograms annually by the end of calendar 2018 and perhaps 150,000 kilograms per year by the end of fiscal 2019 (June 30, 2019). Nevertheless, its sheer size and international breadth could make it a winner.
Before you get too excited…
Now, before you get excited and run to your computer to buy everything with the word “cannabis” or “marijuana” in the company name, understand that this is a very young industry that’s bound to have hiccups. In other words, today’s valuations may contract significantly before it’s determined which companies are the long-term winners.
As noted, it’s going to take years before production capacity is anywhere near what investors have been promised. By the midpoint of next year, Aurora Cannabis may only be yielding about a quarter of its potential at peak production. With these companies spending heavily on existing greenhouse projects, marketing, branding, and international expansion, operating losses are a genuine possibility for some time to come.
Then there’s the very real chance that the U.S. won’t legalize marijuana, even with approval for recreational legalization hitting an all-time high of 66%, per Gallup, in October 2018. It’s no secret that Republican lawmakers have stymied progress for the weed industry on Capitol Hill for a while now. But an even bigger-picture problem is how the federal government would justify legalization when it means removing exorbitant tax rates on pot-based companies in currently legal states. Making marijuana legal, and thereby removing exposure to U.S. tax code 280E, could cost the federal government tax revenue. That’s a big hurdle to overcome.
There’s no denying that marijuana could very well be a multidecade opportunity for investors, but it’s important to understand that it won’t be without risks or rough spots.