In November 2018, marijuana looked to be the hottest investment since sliced bread. Just a few weeks prior, Canada had become the first industrialized country in the world to legalize adult-use marijuana, and the broad-based expectation on Wall Street, as well as among independent analysts, was that pot stocks could quickly grow their sales and generate a profit.
The State of the Legal Cannabis Markets report, published earlier this year by Arcview Market Research and BDS Analytics, offered just a taste of the industry’s potential. Between 2014 and 2018, worldwide revenue more than tripled from $3.4 billion to $10.9 billion, with the report suggesting that global sales could hit more than $40 billion by 2024. Even though Canada wasn’t expected to lead the path forward (that’s reserved for the crown jewel of the cannabis movement, the United States) it was still expected to generate north of $5 billion in annual sales in roughly five years’ time.
And yet, here we are, more than a full year after Canada legalized recreational marijuana, and our neighbor to the north looks like a shell of the image investors had created just 12 months ago.
It’s likely that our northerly neighbor amassed between 1 billion Canadian dollars ($761 million) and $1.1 billion ($837 million) in first-year sales, on a trailing 365-day basis. That’s highly disappointing given the hype surrounding the launch of recreational weed products last year.
Much of this disappointment can essentially be boiled down to two major issues. First, there’s Health Canada, the regulatory agency tasked with overseeing Canada’s legal industry. No one can fault the agency for being so thorough in its licensing process. However, Health Canada began the year with more than 800 cultivation, processing, and sales license applications on its desk awaiting review. Even with midyear changes designed to expedite the cultivation review process, it’s clearly slowed the path of legal product to market.
Secondly, some finger-pointing is deserved at certain Canadian provinces. Ontario, a province of 14.5 million people, only has one open dispensary for every approximately 604,200 people. It could likely accommodate 25 to 40 times as many open dispensaries, yet has been slow to approve licensing for physical dispensaries. Together, this slow rollout of licensed retail stores and Health Canada’s licensing backlog have led to a resurgence in black market marijuana sales.
But there is light at the end of the tunnel. Growing pains in the marijuana industry were fully expected and robust long-term sales forecasts can still be met. However, it’s important that investor can recognize the signs that the Canadian cannabis industry is turning the corner. Many corporations are purchasing land and building grow sites, many are taking over and/or purchasing smaller companies. They are spending money for the future and that is putting a dent in their bottom line. Instead of just watching company sales, focus on margins. Wall Street wants to see that cannabis can be a viable long-term industry that can effectively compete against the black market. Therefore, an industry wide improvement in gross margin would go a long way to signaling a turnaround. It may not happen overnight … but it will happen.
The majority of this article was found at Fool.com and was written by Sean Williams.