If you followed up on market movers recently, you’ll know that medical marijuana and pharmaceutical stocks are on the radar for investors and businesses alike. The number of states that support, and have, legalized the drug is on the rise, and recently, the Canadian market has opened its doors to marijuana, making the drug legal for recreational use on the 17th of last month.
So, what does this mean to the economy? Well according to various market research specialists, the North-American marijuana market could see figures of $125 billion CAD in the coming years. So, should you invest in marijuana? – Well the short answer is no.
After the Canadian legalization, the stock price of most marijuana related titles has been on a steady decline after the initial surge. In order to understand why, we have to do a bit of math – Maybe you shouldn’t have skipped that lecture you had on valuation – Either way I’ve already done it for you:
- According to Canadian estimates, 4.9 million Canadians consume cannabis, and spent an average of $1200 CAD on cannabis related purchases in 2017.
- That gives us a consumer market size of about $6 Billion CAD.
- Optimistically, the demand could increase due to evidence of medical benefits, so let’s say the market grows to $10 Billion CAD by 2020.
- About a third of sales will be from illegal trade, leaving the companies with a market of $7 Billion CAD.
- Factoring in corporate taxes, sales taxes, shipping, the 10% excise tax or colloquially known as the “sin tax”, and of course the costs, after-tax profits could float around $900 million CAD.
The 10 biggest marijuana companies have a combined value of $50 Billion CAD, and if we include every single marijuana related company, the valuation would be around $125 Billion CAD. The numbers just don’t add up, giving it a P/E ratio of about 7. A large part of the market could be commoditized, leaving us with a final estimated market valuation of $10 Billion CAD, a tenfold decrease.
So, does this mean the cannabis market is bound to be unprofitable? Again, the short answer is no. The key to making the cannabis industry resourcefully profitable is the international markets. As we see more and more countries take a step toward legalization, we could potentially see international conglomerates of cannabis with brand recognition and customer loyalty arise.
One thing is for certain, investors aren’t taking their eyes off the cannabis market anytime soon. With legalization, big companies like Coca Cola looking to get in the market with rumours of cannabis-infused drinks, and cannabis-wellness solutions, the industry could see rapid exponential growth, and companies heading into this market and leading the way forward today, could potentially become the leaders of tomorrow.
DISCLAIMER: This article does not provide personal investment advice and the writer of this article is not a qualified licensed investment advisor.