The Market Capitalisation of Cannabis
Background
Medical marijuana had been legal in Canada since 2001. Uruguay became the first country to legalise recreational marijuana in 2013 paving the way for the others [1]. However, huge headlines were made recently as Canada officially legalised the recreational use of marijuana on the 17th of October. Unsurprisingly, on that day, around 111 cannabis shops opened to mark the first day of legalisation [2], with many jubilant customers. Of course. Many went to the extent of dubbing it as being similar to the end of the prohibition of alcohol.
But why was cannabis legalised? Ultimately, if there was one word to summarise why, it would be demand. The goal behind this was to better reflect Canadian society’s changing opinion about marijuana and also to bring black market operators into a regulated system.
In this article, I aim to provide you with an extensive insight into the Cannabis Industry.
So, What’s the Deal?
First and foremost, the Canadian government seeks to effectively pardon criminals with an overall cannabis possession record of 30 grams or less, after becoming the world’s largest country with a legal national marijuana marketplace…
- Canadians will also be able to order cannabis online through private retailers or websites and have it delivered to their houses.
- No stores will open in Ontario, which also includes Toronto, however sales will be exclusively online.
- The packaging is required to state all of the information that a consumer needs to make an informed purchase decision, including the name of the producer, the strain of marijuana, and its THC/CBD content which in simple terms is a measure of its potency. This also contains a large disclaimer about the health risks associated with the marijuana being sold. Moreover, for maximum safety, the product packaging is designed to be very uninteresting and mild to prevent people from accidentally mistaking its contents for something else other than cannabis.
- A maximum of 30g of dried cannabis is allowed in public space.
- Providing a minor with cannabis risks up to 14 years in jail or a $5000 fine
Let’s Talk Business
M&A deals in 2018 for the cannabis industry demonstrate how organisations have positioned themselves to take advantage of this new and burgeoning market, particularly with various beverage companies such as Constellation Brands (the maker of Corona Beer) which was especially keen to grab a slice of the cake. The company increased its stake by $4bn in Canopy, a marijuana company. Drinks companies are looking to diversify sales therefore I predict that major beverage companies will soon look to enter the market in an attempt to incorporate Cannabis-related products into their catalogue.
The head of alcoholic drinks research at Euromonitor International, Spiros Malandrakis stated that “the growth we expect for the cannabis industry is going to be exponentially higher due to the events of the past month and the past days”. What he meant by these ‘events’ is essentially Canada’s legalisation of recreational cannabis on the 17th of October and also the US midterm elections which resulted in the Democrat’s winning the House of Representatives. This was seen as a leap forward for the potential legalisation of recreational Cannabis nationally in the US.
Case Study: Tilray
Tilray is a cannabis company that recently listed on the NASDAQ. But what is remarkable is that it was the first cannabis company to go public on the US exchange, so it effectively became the first marijuana company to IPO on the US stock market. Tilray grows, processes and distributes marijuana with the ticker name TLRY. It experienced an initial pop of 38% share price upon it’s IPO, which wasn’t a VERY huge rise but was promising. Tilray announced that it would become the first company to export medical cannabis to the US for clinical trials. The stock price closed at 38% after the market had closed on its first day but it was particularly noteworthy that the price peaked at 94% – it hit to $300 [6]. That is substantially huge.
And why did this happen? This is because investors were excited and there was an explosion of demand but Tilray was still a very small company; and when companies list, they list with a small float (not many shares). This float gets smaller if the company goes in to an ETF index (which Tilray did). So, there was rising demand and at the same time, shrinking supply.
Well what is the reason for this? There was a lot of speculative interest in the shares and a lack of knowledge on company prospects and proper valuation techniques so there was more speculation on
future growth rather than a rigorous fundamental analysis for other companies within the industry.
After 45 minutes, the share price actually went negative – so an investor who bought at $300 would definitely not have been happy.
At it’s very peak of trading, the company was valued at $20bn. But way back in its Q2 earnings, they had less than $10 million in revenue and were making a loss, so Tilray is certainly a company in its early stages. However, it is important to note that their revenue has been up to 95.2% – meaning that there is a huge aspect of potential growth. Tilray mentioned its proceeds are going to increase the growing base for Cannabis.
Investors are investing in this growth but there seems to be a lot of risk, especially because it is such early days.
Below is an image of share prices for various Cannabis producers, the huge rally in price was off the back of the legalisation in Canada.
Verdict
The Cannabis market certainly seems like an interesting industry as it develops and one that has potential. Coca-Cola has recently mentioned that it is also looking to enter the cannabis space. Perhaps they may be exploring the use of this as a new ingredient, or producing a new product? Time will tell, and all eyes are on the future leadership of the market.
Personally, I believe that major beverage companies will look to incorporate elements of this market to diversify their sales and customer-base, and that will be interesting to look out for in the future. We may also see more Canadian Cannabis producers try to list in the US with IPOs. The extent to which we see other deals being made, and how well these deals do will reveal more about this industry’s success as a burgeoning market.
In the UK, it seems that the legalisation of marijuana is still a far cry from reality. Despite significant steps being made in regard to medical marijuana, the government have held an opposing stance towards recreational cannabis being legalised [8].
Do you think that Coca-Cola will actually strike a deal with a Cannabis-producing company?