Marijuana: “High” Growth Potential!

Yesterday, after a dominating 52-29 vote, the Senate passed the bill to legalize recreational cannabis by mid-September at the latest.

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However, Prime Minister Trudeau today said that legalization of marijuana in Canada will be pushed back a few weeks until October 17, 2018, after several big provinces like Quebec ask for an extension to prepare for retail, production, and transition.

“This is something that we want to get right,” Mr. Trudeau told reporters.

“It is our expectation that – even though we recognize legalization of marijuana is a process, not a single-day event – by giving the provinces more time to ensure that they are fully ready for the day of coming into force of this legislation, it will be a smooth success in all the ways that we can hope for.”

Trudeau also recently tweeted that the legalization of marijuana in Canada will create a safe environment for citizens to use the product for recreational and medicinal use without liabilities, and will also drive money away from criminals.trudea marijuana tweet.png

Either way, it seems the legalization of marijuana is no longer a debate of if, but when. I drove through Vancouver just yesterday, and I swear I saw more Marijuana Shops then I saw Sushi restaurants. I just wanted some sushi! And while it is a bit upsetting that the date is pushed back, it gives investors an opportunity to look more onto this opportunity before the true wave hits, so don’t sit on this trend!

Let’s take a look at Canada’s largest Cannabis company: Canapoy Growth Corporation ($CGC).

Canapoy Growth Corporation ($CGC or $WEED)

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First off, the risk-reward on marijuana stocks is incredibly high right now. There is no doubt that if you decide to invest in weed, you are investing & speculating on the potential for growth, not the current business cash flow. It’s a risky business, but there is a lot of potential for growth.

Let’s take a look at Canopy Growth Corporation’s numbers:

First off, its market capitalization is hovering just under $7 billion as of June 20th, 2018, trading at about $32 per share, after jumping up 12% in the past month. Revenue is up 78% year over year, and of course, this is just the beginning, and there is a lot of expectations on Canopy Growth to be at the forefront of the marijuana industry once October sets in.

However, CGC’s revenue last year was only about ~$40 million. So they are trading at over a 150x multiple on earnings, which is extremely risky, to say the least. Obviously, if a company is worth $7 billion, earning only $40 million revenue for 2017 does not look too great.

But we aren’t really here to look at the numbers.

I mean, Amazon wasn’t profitable for years. Tesla’s numbers don’t look great. Twitter didn’t start turning a profit until recently, and WhatsApp’s revenue is nowhere near where Mark Zuckerberg would like it to be, but Facebook still paid $19 billion to lose $300 million in 2014.

With the marijuana industry, we are looking to make a speculative investment.

Canopy Expansions

Canopy Growth also has the potential to make an impact in the global medical marijuana market outside of Canada. The company bought MedCann in 2016, a move that gives Canopy a solid base for growth in Germany as well as in other European nations. As of late May 2018, the Canopy Growth had eight grow sites, in seven countries (Canada, Australia, Brazil, Chile, Denmark, Jamaica, and Spain.), with total capacity above 2.4 million square feet. Canopy Growth recently acquired Daddy Cann Lesotho, a deal that positions the company to target medical marijuana markets in South Africa, contingent on the finalization of regulations.

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Another reason to “pour” money into marijuana stocks? Well, Canopy also has a partnership with Constellation Brands ($STZ), known for Corona and its other alcohol brands, and the two companies and currently working together to potentially develop a cannabis-infused alcohol product line. Watch out for weed in your beer?

Aurora Cannabis: Growing Fast

Aurora Cannabis ($ACB on the Toronto Stock Exchange, OTC American Markets) could very well surpass Canopy Growth.

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Aurora recently announced a friendly takeover on Med Releaf in mid-May 2018 for $3.2 billion in stock. After the takeover is complete, the joint company will be able to produce up to 570,000 kilograms of cannabis at its nine operations within Canada and two in Denmark, with distribution agreements in Germany, Italy, Brazil and Australia. The value of this new company could be as high as $7 billion or more, which will be right in the race with Canopy Growth for the largest market cap in the marijuana industry, so be sure to watch out for the updates on these two companies merging.

Aurora also completed its acquisition of another Canadian company, CanniMed Therapeutics Inc. for $1.1 billion, in March 2018.

Again, the financials don’t look great for these marijuana companies. Aurora reported $14 million in revenue in 2017, but its stock is currently being valued at over $4 billion. Right now, Aurora’s stock is at $7.50/share as of June 20th, 2018.

Investor Beware

As I mentioned earlier, the marijuana industry is largely a speculative market right now. I’ve yet to see any cannabis company with stable and sound financials. Canopy Growth, the largest marijuana company in Canada, is valued at over 150x its revenue for 2017. Aurora is valued at over 250x its revenue for 2017. Though, I can’t be completely sure these numbers are entirely accurate due to how new these companies are, which generally means statements are less consistent and regulated (found on Yahoo Finance).

Most likely, both Canopy Growth and Aurora Cannabis, and other growing marijuana companies will depend a lot on credit lines and investors. A lot of debt will be taken. Canopy Growth right now is actively investing their capital into expanding growth operations, preparing for October 17th. Marketing will be huge and production costs will be important.

Again, because these cannabis businesses aren’t actually creating the revenue that they could be potentially creating due to the legalization waiting period, there is no way to really know how much money companies like Canopy Growth and Aurora could generate in the coming years. Obviously, how successful the marijuana industry becomes in Canada will largely depend on retail consumers adopting the product for recreational and medical use as a common use. Depending on the recreational use, the marijuana industry could completely blow up once October rolls in. I guess its time to start tweeting #420 again? Or maybe, it should be #1017 for Canada.

The Future

Large Tobacco companies will surely look to target the cannabis market and potentially acquire/take over the smaller marijuana companies in the industry.

As well, watch out for the legalization of cannabis in more American states, as well as into other global markets. Right now, only, nine states—Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, and Washington— have legalized the sale and possession of marijuana for both medical and recreational use. The first movers into the American markets and other countries will surely be able to take advantage of the potential.

For me, I’ll be looking closely at the marijuana industry, as I am an investor of Canopy Growth ($CGC). I personally believe the marijuana industry has the potential to match both the tobacco and alcohol market in the long-term. And although I am not a user of any substances, I do think that if I can legally use products like tobacco and alcohol in Canada at 19, marijuana seems like not too far of a stretch at all. After all, alcohol addiction rate (16%) and tobacco addiction rate (32%) are both higher than marijuana addiction rate (10%). Yet, research is heavily lacking in cannabis, but the only way to readily conduct more research is to make it accessible. Legalize it!

3 Arguments Why Marijuana Should Stay Illegal Reviewed


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Email me: downtofinanceDTF@gmail.com

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Disclaimer:

I am not a professional financial advisor or planner as much as I’d like to be. All thoughts on the DTF Website are strictly my opinions unless otherwise stated. I understand there may be errors in my writing. My articles are not meant to be offered as professional advice, as I am currently learning a lot about finance myself. Please always do your own research and due diligence when it comes to financial decisions. Money is very important! I may own some stocks discussed in this article.

 

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2 comments

    1. Well, I like the idea of the MJ ETF because it’s a great way to diversify in the marijuana market. The cannabis industry is much like the tech boom of 2000. It’ll be the future, but a lot of these companies will go bust first. Let’s be honest, weed will stay for a long time. But which company will come out on top? Not everyone can pick the next Amazon, so the MJ ETF is a great way to get your head in the game. Dollar-cost-average if you want to put some in this risky market.

      Liked by 1 person

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