After legalization in October of 2018, the once prohibited substance took the Canadian market by storm. In July 2019, StatsCan estimated that the Cannabis sector had contributed roughly $8.26 billion to the national GDP. However, recent market volatility has left investors asking: What’s next for Marijuana?
Marijuana was legalized last October. In the 10 months that followed, the Cannabis sector saw a growth of 185%. One year later, not only has the sector contributed $7.02 billion to the national GDP, but – as StatsCan indicates – it continues to grow at a very steady rate. Among other strong points, one evident benefit of legalization is that the black-market cannabis output has decreased by 21%.
As revenue and awareness continue to climb, it is expected that the Cannabis industry will follow the same trend – though not as quickly as first projected. In recent weeks, investors have been dumping their pot stocks causing the prices to plummet. And as prices plummet, the notion of cannabis being a secure investment is going up in smoke, excuse the pun.
A multitude of negative influencers on the pot industry, from the insurgence of black-market pot to the slow roll out times of legal store fronts, have made Cannabis a volatile investment. This has greatly affected local companies, which have been under fire and are now making drastic attempts to recoup loses. Take Hexo and Canopy Growth for example. After stock price losses of nearly 53% in 10 months, Hexo recently changed its CEO. And following closely behind, Canopy Growth reported a loss of 47% this year. If you have been following the cannabis market, these developments would indicate that as a whole the Canadian Cannabis market is declining rapidly.
Why can’t legal cannabis compete with its illegal competitors? The answer, in one word, is price. According to Statistics Canada, in October of 2019 legally traded cannabis sold for $4.00 more per gram than illegally traded cannabis. Moreover, 34% of respondents reported that using legal cannabis is just too expensive.
So, what can be done to boost legal cannabis’s purchase in the future and what’s next for the pot play? First, prices must drop so that they can compete with illegally traded Marijuana. Second, accessibility must increase. Store fronts need to be established faster and in more optimal locations to make cannabis more accessible to potential customers. Alberta is already on the right path with this idea; The province set a goal to add 500 more store fronts by the year 2021. Finally, authorized vendors need to differentiate their offerings. If pot is pot, what is the point of paying more for the same product?
Based on current stock prices and potential future growth, my investment recommendation would be to purchase under valued pot stocks and hold them until the government can catch up with the demand and suppliers can adequately adjust their prices.