Rolling in the Green

According to a recent report by Grand View Research, the global, legal cannabis industry is expected to value USD 66.3 billion by 2025, with a CAGR of 24 per cent. This includes both medical and recreational uses of the drug, as well as ancillary products. Another estimate by the Cowen group forecasts the market to be worth USD 75 billion by 2030. If you include the black market as well, estimates could easily double. 

In today’s day and age, any industry with double digit growth forecasted well into the future is a cause of interest. And more importantly, concern. So is the marijuana industry really the investment opportunity of a lifetime? Or is it just a bubble waiting to burst?

The cannabis industry consists of firms engaged in cultivation, dispensaries or recreational stores, infused product manufacturers, and ancillary services and products. Amongst these, the highest profitability lies with the ancillary services and products business, due to the low initial investment, and ability to charge premiums. In contrast, dispensaries, stores, and cultivators need to invest huge sums of money initially, making their ultimate profitability modest, at best. 

If we look at cannabis related stocks in particular, companies with the highest profit margins, such as Innovative Industrial Partners (profit margin of 51 per cent), and Constellation Brands (profit margin of 42 per cent),  these firms are either involved in ancillary businesses or have a diversified business portfolio.

While many countries have legalised cannabis in varied forms, and many more are expected to follow suit, there are still many challenges being faced in the industry. Strict laws, red tape, and varying regulations from country to country and state to state make the industry a landmine to be maneuvered carefully through. In the US for example, banks are not yet allowed to deal with the industry, forcing businesses to manage large amounts of cash. While this is expected to change soon, it is an example of one of the many regulatory challenges faced by the industry even within the legal sphere.

More than half the states in the US have currently legalised the use of cannabis in some form or the other, out of which 10 states have legalised adult consumption (recreational use). Out of the total global sales forecast for 2025, half are expected to come from the US alone. Other large markets include Canada, Germany, United Kingdom, and Mexico.

Canada was the first industrialised nation to legalise marijuana use last year (2018), leading to rapid investment into, and growth of the industry. Looking towards Europe, Germany is one of the most advanced when it comes to legalisation of marijuana use. Not only is medical marijuana legalised, it is also covered by insurance, and is relatively easy to get a prescription. 

However, with growth of cannabis being forbidden in the country, there is a heavy reliance on imports, primarily from Canada. While marijuana laws in the UK are currently strict, the UK’s Advisory Council on the Misuse of Drugs has recently opened up to the benefits of cannabis and physicians are expected to soon be allowed to prescribe the drug. The industry is thus expected to grow at a rapid pace. 

As public perceptions towards the drug begin to change, and more and more countries open up to the idea of legalising cannabis in some form, the industry is expected to gain momentum. As with any industry however investors need to be cautious with their money, and ensure they are getting the right bang for their buck.

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