The cannabis industry seems like an obvious way for investors to make money. There’s immense demand for cannabis products, and plenty of companies would like to sell edibles, concentrates, flowers and similar items to consumers.
Common wisdom says that the value of cannabis stocks will grow as more states legalize medical and recreational access. Yet somehow, that hasn’t happened. Cannabis stocks have struggled to gain much traction, even though about half of U.S. states have legalized cannabis.
Despite the bad news, it’s possible that the cannabis industry will turn around very soon but what will be the spark to ignite them?
The Cannabis Industry’s Current State
Even as more states legalize cannabis, companies need to dump massive amounts of money into building “grow operations”, distribution channels and stores. These high-growth phases undercut short-term profits. The bet is the investments will pay off when revenues mushroom higher.
That hasn’t happened yet. Even Canopy Growth, one of the industry’s biggest players, lost around $9 billion in market capitalization over the last year. Shares once traded for more than $40. Now, you can pick up shares for less than $3 each.
Horizons Marijuana Life Sciences ETF has also crashed over the past year. In July of 2021, you could expect to pay about $10 for a share. Now shares trade for under $4 each, and the downward trend looks like it will continue.
Is the industry positioned for growth despite the loss of value over this past year?
The Spark That Could Ignite Growth
Few countries have legalized cannabis on the medical and recreational levels. Countries with legal cannabis include:
A few additional countries let residents grow and use cannabis, but they do not allow sales.
Now, there’s a chance Germany will be added to that list. Germany already has legal medical marijuana, but it has resisted recreational cannabis. Under Angela Merkel’s leadership, that probably wasn’t going to change.
However, Olaf Scholz was elected as Germany’s prime minister last year, ending 16 years of leadership under Merkel. The change in leadership creates enormous opportunities for potential growth in several industries, including cannabis.
Scholz has good reasons for pushing Germany toward cannabis legalization. A legalized cannabis industry is forecast to create about 27,000 jobs and raise more than $5 billion in taxes. The change could happen as soon as next year. Lawmakers have already started drafting a bill to legalize recreational cannabis products.
If this happens, Germany would have the largest population of any country with legal cannabis. Perhaps even more importantly, legalizing recreational cannabis in Germany would encourage other European countries to take steps toward changing their laws.
Countries that share borders with Germany would need to relax their possession laws or change their laws to prevent people from spending their money in Germany. They could either spend a lot of money enforcing laws that most people don’t want or adapt to the changing legal landscape and start generating tax revenues.
Yes, it would take some time for countries to change their laws, but the value of cannabis stocks would probably grow before the changes happen. On the whole, analysts anticipate a huge shift in European laws. Buying cannabis stocks early would position investors for higher returns.
More Reasons for Optimism
Germany is the most likely spark that will ignite the cannabis industry, but it isn’t the only reason for optimism.
Last year, members of the U.S. Senate released an early draft of what federal cannabis legalization might look like. Some reports say the Senate has made exceptional progress. It might even have a bill ready before the end of July.
Could the Senate legalize cannabis at the federal level?
It seems unlikely, given the chamber’s polarized nature. It would need every Democrat to vote in favor of legalization. It’s possible that some Republican senators would also vote in favor of legalization. However, the current state of D.C. politics makes any progress challenging.
Failing to legalize cannabis in the U.S. in 2022 would hurt a little, but it also sets the stage for future laws. Over 90% of Americans want to legalize medical cannabis. About 60% say they support legalizing recreational cannabis. Even 47% of people who say they are Republicans or lean Republican want to legalize recreational cannabis. An additional 40% want to legalize cannabis for medical use only.
Should You Buy Cannabis Stocks Now?
Cannabis stocks are trading at relatively low prices right now. Should governments change their laws at the federal level as expected – and Germany in particular – cannabis companies should have remarkable opportunities for growth.
The challenge is forecasting the timeline. It’s impossible to predict when governments will prioritize legalization. That’s the risk of buying now. The potential reward, however, is getting in on the ground floor and reaping the financial rewards as more countries allow medical and recreational cannabis sales. If you’re looking long-term, now might be prime time.
One of the best bets we see is Tilray. When we ran the numbers we arrived at an intrinsic value or fair market value per share of $4.39 – using a discounted cash flow forecast analysis – which would suggest upside possibility of 23.4% at the time of research. The company’s trajectory looks very promising.
Revenues grew from $179 million in 2019 to $405 million in 2020 and $513 million in 2021. By 2024 it is forecast to hit $1 billion in sales. That same year, operating income is expected to turn positive. And when it does you can bet the market will be paying attention.