Hindsight is always 20/20 — especially in the investment world.
For example, patient investors that held onto Amazon stock after the dot-com meltdown of 2000 are currently sitting on returns of up to 36,000 per cent.
And similar tales will undoubtedly be told about the cannabis crash of 2019 with the savviest of investors reaping the biggest rewards, says Tom Adams, managing director at BDS Analytics.
“The fundamentals are still strong and the growth prospects of an industry like this are so strong that investors will be back,” he said. “The stock collapse is just that a stock collapse and the overall cannabis market will recover because of those strong fundamentals.”
While pot stocks on average have tumbled 66 per cent since 2019 highs, global consumer spending on legal cannabis increased by 46 per cent last year, according to a new report by cannabis data firms BDS Analytics and Arcview Market Research.
Total sales reached US$14.9 billion in 2019, and that number is expected to almost triple to US$42.7 billion by 2024, according to the report.
“While valuations of public cannabis stocks may indeed have gotten ahead of themselves in the wake of Canada making history in October 2018 by legitimizing legal cannabis on the world stage, the subsequent sell-off looks extreme from the mid–point of a two-year period in which a US$10.2 billion 2018 market appears on track to more than double to US$20.7 billion in 2020,” the report reads.
Despite his bullish outlook, Adams warned that pot companies still have to cut back expansion plans and staff this year in an effort to hoard cash while they wait for financial markets to recover, something they’ll need to again raise more money.
“There were dozens of public internet companies that simply died from the 2000 crash and unfortunately that’s going to be the case for some cannabis companies too,” he said. “But you can’t predict which ones will make it just like you couldn’t predict the survivors of the 2000 dot-com crash.”
U.S. makes up lion’s share of global cannabis sales
But today’s cannabis players should keep their eyes on the prize, Adams says.
Much of the expected growth in the next five years will be due to the more rapid takeover of the US$60 billion North American illicit market by the legal market — especially in the U.S., according to Adams.
The 2020 Update to The State of Legal Cannabis Markets report projects compound annual growth rates for worldwide legal cannabis sales of 27 per cent through to 2024. And the U.S. will still account for roughly three-quarters of the total US$42.7 billion global market by then.
The 55-page report says new markets in Michigan, Illinois and Massachusetts will be key drivers to future growth.
“The lines forming on the streets of a freezing Chicago in the early weeks of adult-use legalization there had sparked a modest recovery on Wall Street,” it reads.
Recreational pot shops in Illinois sold almost US$40 million worth of legal weed in January, according to state officials.
“There’s finally these states other than the western block that are fully legal for adults to consume, and that’s just going to have a major impact in the next five years,” said Adams.
But the cannabis analyst says medical-only markets in Florida — and Oklahoma in particular, which has taken a very liberal approach to licensing — are also booming.
Adams said BDS doesn’t like to make political guesses, but when the firm does its modelling it has to make some assumptions.
One of those guesses is that the State of New York will start generating legal adult-use sales in 2022.
While the fourth-most populous state is planning on legalizing this year, Adams explained that most U.S. states take up to two years to implement their legalization programs.
By 2024, BDS projects total legal cannabis sales will reach US$1.7 billion in the Empire State.
Adams said that number would be higher, but New York’s illicit market is so strong and will remain resilient to the high taxes proposed by state legislators.
Canada will boast the world’s second largest legal pot market
Despite red tape and high taxes, California will remain the world’s largest legal market with sales predicted to jump from US$3.1 billion in 2019 to US$7.2 billion in 2024, according to BDS.
The data firm predicts the Canadian market will also endure similar headwinds and come in second with US$6.2 billion in consumer spending by 2024.
Because cannabis has been treated like heroin by both American and Canadian law for most of the 20th century, regulators have taken a very cautious approach “to prevent the legalization of cannabis from ruining society,” Adams says.
But a drop in prices similar to what was experienced in Colorado’s more mature cannabis market several years ago will bring more consumers to the legal side, he said — even more than relaxing of laws would help.
While Statistics Canada estimates the country’s total illicit cannabis market is worth $3.7 billion in Canadian dollars, Adams says that estimate is “ridiculously low.”
Instead, he believes Canada’s underground market is closer to California’s US$9 billion illicit market ($12 billion Canadian) considering both jurisdictions share similar populations.
“When you see up to 20 per cent of the total Canadian population consuming cannabis in some form compared to the couple hundred thousand patients there were in 2018, you’re going to get massive, massive growth,” Adams said.
Germany, Mexico will lead international growth
Internationally, legal sales will grow from US$517 million in 2018 to US$5.4 billion by 2024 — driven by Germany’s expanding medical-only market and Mexico legalizing adult use this year, according to BDS.
Mexico is expected to be the first country to legalize cannabis via a judicially mandated process in 2020, which differs from the more traditional model of voter initiatives and political pressures forcing legislators to legalize, the report explains.
Adams says the world is watching legalization efforts in Canada and especially the U.S. states that have legalized for more than five years.
“Basically, the U.S. and Canada are running five or 10 years ahead of the world on this issue, depending on which part of the world you are talking about,” he said.
“The sky did not fall because cannabis was legalized and that has got the attention of regulators around the world,” he added. “In 10 to 15 years we expect to see the rest of the world to be fully medically legal and a significant portion of it be legal for adult use.”
Just another reason why his cannabis data firm expects pot stocks to eventually be running with the bulls in the years to come.
Top image courtesy of Tilray Inc. (NASDAQ: TLRY)