In Canada, the cannabis industry booming. Warehouses and factories that have been abandoned are being converted into cultivation sites, and greenhouses once filled with flowers or green fruits are now turned into pot plantations. Celebrities are endorsing products from industry leaders like Canopy Growth Corp., (the country’s largest producer); and investors have also made substantial profit in the short run. But the propaganda doesn’t fall in line with the long term indices which guide the stock market. The simple principle of supply and demand will reverse the overvaluing of cannabis stock—a process that has clearly begun, with cannabis stocks down 17 percent in the first week of February. The full legalization of marijuana in Canada will be a big step towards harnessing the fiscal benefits of a blooming industry in its prime, but just like any other commodity, it is subject to the general laws of economics.
Canadian cannabis stocks have increased exponentially as there is a likelihood that the legalization of recreational marijuana would happen in July. Canada now hosts dozens of public companies that are worth approximately $30-billion in combined market capitalization. And this was a sector that was practically non-existent half a decade ago. Individual investors and new exchange-traded funds are pouring cash into cannabis, and that only reflects a part of the growing interest from marijuana industry enthusiasts, even as pension funds and many other institutional investors believe that the sector is too speculative. Now, it appears that valuations are stretched as supply is envisaged to enormously outstrip demand. Cannabis prices are plummeting as a wave of ‘panic selling’ hit the Canadian market.
Once cannabis is legalized, Canadians can purchase their cannabis in a dispensary rather than from their neighborhood dealer. Canadians will spend between the average amounts of $4.9-billion and $8.7-billion annually on cannabis. When Canadians can buy recreational cannabis in a dispensary rather than from a dealer, a gram is initially expected to sell for $10. This price includes a percentage for retailers and taxes. That’s a huge advantage to the black-market price. And experts are speculating that the illegal market will not be vanishing anytime soon.
If recreational cannabis is sold for $10 a gram after legalization as is expected, the industry will at first appear to offer big profit margins. However, these margins will disappear after governments and retailer sellers take out their cuts. Producers will then, only get about $3.50 per gram. After other expenditures, the estimation is that the Canadian cannabis industry, for instance, with $5-billion in annual sales could reap a little more than $1-billion as gross profit.
Oliver Babin, a 21-year-old business student currently in his fourth year as a University of New Brunswick student, is part of a nine-person team that runs an investment fund as part of their studies. As in the case of many investors, some of Mr. Babin’s colleagues are caught up in pot-stock frenzy. A few of them made their debut into the equity market into stocks such as Emerald Health Therapeutics Inc. IN November 2017, its shares traded around $1.50 and just three months later, the British Columbia based cannabis producer hits $9.00. Financial statements of the company for the first nine months of 2017 illustrate $658,000 in revenue and $4.8-million as loss. This, however, does not seem to be a bad record, given that they just took over Newstrike Resources Limited. At some point in January, the latter achieved a market capitalization of approximately $1.1 billion, which is now less than $400 million.
The rate at which Canada’s pot stock prices skyrocketed just doesn’t add up; many investors feel that way, including Mr. Babin. He sees it like a balloon which has been blown to its limit and would burst anytime soon. For him and his colleagues at the University of New Brunswick, it’s a big “no” to cannabis stocks. The student-managed fund does not own any cannabis stocks and is never intending to. “The price on these cannabis companies makes no sense. It is market trading on momentum, not value,” said Mr. Babin. “None of these companies invented marijuana. Canada is just changing the supply chain for the industry…The cannabis market is in its early stages, with low barriers to entry and numerous competitors who haven’t shown they have a sustainable competitive advantage.”
The phase that Canada’s marijuana business is going through is not different to what unravels in any new FMCG industry. There’s always a multitude of startups when the industry is fresh, then integration with some of the industry leaders, and a few small high-end brands. Some analysts claim that funded capacity for the Canada cannabis industry far exceeds demand, and are not sure if there will be an export market. This is because they expect that other countries will develop their own domestic industries.