Should we move money into cannabis?

Following New York state legalising recreational marijuana in April, some may interpret this as a signal of further progression of the US cannabis market. As of today, 36 states deem medical use of cannabis to be legal, with recreational use legalised in 17 of those 36 states. With cannabis industry executives optimistically predicting a domino effect on a state level, is this a chance for investors to take a gamble on cannabis?

Unlike many industries and businesses which have suffered during the pandemic, cannabis has experienced significant growth. Consumption of both medical and recreational products has increased, with 2020 sales in the US reaching $20 billion (New Frontier Data) with several new and exciting developments planned for the near future, leading to predictions of a bull market in 2021.

Additionally, an increase in government spending has reduced public budgets, prompting initiatives to source different ways of generating tax revenue. Virginia, New Mexico, and most recently New York, have ‘hopped aboard the tax train’ by legalising recreational cannabis. Accordingly, this may pressure neighbouring states to legalize cannabis as well in order to prevent a flight of tax revenue.

Currently, on a national level, cannabis is currently still classed as a schedule-1 drug. The SAFE banking act (House-passed bill, now in Senate), which allows cannabis businesses to access banking services, and the Cannabis Opportunity Reinvestment and Expungement Act (MORE), which aims to deschedule cannabis from the Controlled Substances Act & enact criminal/social justice reforms related to cannabis, are both pending bills, showing how this industry’s future lies within the decisions of policymakers, a two-edged sword from the perspective of any potential cannabis investor.

Despite the uncertainty arising from politics, cannabis is still projected as a good buy and investment. Brendan Kennedy, the CEO of Tilray, says that we are “starting to see institutional private equity firms, venture capital firms, some hedge funds and much larger institutions, make investments in this industry, in the US and in legal markets outside the US.” Notable companies include Dutchie, a rapidly growing cannabis technology platform that powers dispensaries. Recently, they announced the completion of its $200 million Series C funding at a $1.7 billion valuation, with investors such as former Starbucks CEO Howard Schultz, NBA superstar Kevin Durant, and hip-hop legend Snoop Dogg.

Outside the US, the European cannabis market is projected to grow at 30% annually from $3.5bn in 2019, with Germany leading the way as the largest market for medicinal use of cannabis. In the UK, according to industry groups, an unanticipated boom of sales of consumer cannabis products means the popularity of cannabinoids is set to exceed the market for Vitamins B and C combined. The industry estimates these markets to reach £690m this year, more than double the £314m of sales in 2019.

From a medicinal perspective, there has been a breakthrough in finding new cannabinoids such as CBG and CBN which show significant benefits compared to major cannabinoids. Preliminary research shows CBG could inhibit cancer growth and possibly kill drug-resistant bacteria, which has attracted interest from companies in the pharmaceutical industry.

Cannabis as an investment, however, has its drawbacks. Many companies operating in the industry aren’t profitable and may only have sufficient cash positions to fund future operations (with their funding source primarily from VCs e.g., Dutchie), and investors will have to buy into their plans to achieve profitability. Moreover, leading cannabis companies have high valuations, and if there is overconfidence in the potential legalisation of cannabis, these valuations may drop.

With a record-high 68% of Americans now supporting legalization, the reasons mentioned above might be enough to convince investors that cannabis is a good opportunity. However, given that it is a largely unknown and unproven industry, it will largely depend on individual perception of the industry’s outlook and political sentiment regarding its development and progression.