An end to cannabis prohibition would create a massive industry almost overnight
Changing US and Canadian laws and softening consumer sentiment is taking cannabis from street corners to Wall Street – with analysts predicting recreational cannabis could be a $50 bn industry by 2026 in the US alone.
Investors are moving to capitalize on the burgeoning North American cannabis market. Cowen & Co, led by managing director Vivien Azer, held a US investor conference on cannabis earlier this year, with more than 150 people in attendance.
‘For the recreational and medical (non-pharma) market, we think in its legal form it’s about $6 bn,’ Azer says in a video on Cowen & Co’s website. ‘But there’s a massive black market, given that 32 mn consumers use cannabis every year in the US. We think the current market is $30 bn today and we think it’s going to get to $50 bn by 2026, assuming federal deregulation.’
These numbers are backed up by Ackrell Capital, which predicts that recreational cannabis will be a $50 bn industry in the US 10 years after legalization, in addition to the US pharmaceutical cannabis industry growing to $50 bn.
Comparison between cannabis consumption and other stimulants in the US
| Alcohol | Coffee | Tobacco | Cannabis (future) | |
|---|---|---|---|---|
| Adult penetration | 50% | 50% | 17% | 20% |
| Consumer monthly spending | $45 to $200 | $80 to $100 | $40 to $80 | $50 to $500 |
| US retail market size | $200 bn | $35 bn | $100 bn | $100 bn |
Source: Ackrell Capital
A BUDDING INDUSTRY
Canada is taking the lead, having set up a government taskforce to legalize recreational cannabis by next summer. It’s also home to Canopy Growth, the only cannabis company to be listed on a major stock exchange, boasting the ticker symbol WEED. Cowen & Co estimates that year-one sales of cannabis will reach $4 bn in Canada, doubling to $8 bn by 2021. For context, alcohol is a $21 billion industry.
In the US, the regulatory landscape is a little more complicated. Eight states – Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington – and the District of Columbia allow the recreational use of cannabis, and 21 states have decriminalized the drug. Yet it remains illegal at the federal level to grow or sell cannabis, and there are additional complications about securing bank loans, submitting federal tax returns and navigating nuances in state-by-state regulation.
Despite US President Donald Trump’s pledge during the election to allow cannabis to be an issue for states to resolve themselves, Attorney General Jeff Sessions recently addressed cannabis publicly. ‘Marijuana is against federal law, and that applies in states where they may have repealed their own anti-marijuana laws,’ he said. ‘So yes, we will enforce law in an appropriate way nationwide.’
The complicated regulatory and political environment isn't halting the change in US consumer sentiment, tracking a change in attitudes from one generation to the next. According to Gallup, 60 percent of Americans now support legalization of cannabis, compared with only 12 percent in 1969.
‘What’s happened over the last 20 years is consumer sentiment has changed,’ Azer says in the Cowen video. ‘There’s a broader appreciation that it’s less addictive than alcohol.’
Support for legalizing cannabis by age (US)
| 18-34 | 35-49 | 50-64 | 65+ | |
|---|---|---|---|---|
| 1969 | 20% | 11% | 6% | 4% |
| 1985 | 32% | 22% | 16% | 13% |
| 2000/01 | 44% | 34% | 30% | 27% |
| 2015 | 71% | 64% | 58% | 35% |
Source: Gallup and Cowen & Co
THE GREEN RUSH
Canopy Growth is the largest cannabis company in the world, currently valued at $1 bn. It graduated to Toronto Stock Exchange in July 2016, having previously been listed on Toronto’s venture exchange. Speaking exclusively to IR Magazine, Bruce Linton, Canopy Growth’s chief executive, describes how investors have warmed to cannabis in recent years.
‘Four years ago I could barely give away equity in the company,’ he says. ‘The investors I’m speaking to now are increasingly substantial international funds that are looking at a global evolution.’
Linton says Canopy Growth is exporting to markets like Germany and Brazil, where medicinal use of cannabis is legal, and focusing on the Canadian market. The Cronus Group and Tilray, which belongs to the cannabis-oriented private equity firm Privateer Holdings, are also using Canada as a home base to export cannabis internationally. Marley Natural, a company established by musician Bob Marley’s children, also recently launched in Washington State.
While the legal and regulatory landscape in the US may deter shareholders, there are still opportunities for investors. Kush Bottles, which manufactures childproof packaging and equipment, has seen 44 percent growth in sales in the last year.
Scotts Miracle-Gro presents an opportunity for investors to legitimately enter the cannabis market in the US. The lawn and garden company has been aggressively acquiring hydroponics companies, which manufacture the equipment needed to grow cannabis. In 2016 the hydroponics arm of Scotts Miracle-Gro generated about $250 mn, accounting for around 10 percent of the company’s overall revenue.
Beyond this, there is a whole eco-system of growers, dispensaries, packaging and equipment manufacturers, e-commerce platforms, news websites, consulting firms and vape device companies that could join the industry.
But a dispensary in Colorado and a dispensary in California will be subject to very different laws. This places a ceiling on the growth prospects of some of these businesses and makes it hard to predict where consolidation and growth might come from: how many of them can afford the administrative and legal costs – and incur the legal risks – of expanding outside of their state?
COULD OTHER INDUSTRIES TAKE A HIT?
According to both Cowen & Co and Ackrell Capital, the legalization of recreational cannabis will have an impact on several other industries, for better or for worse.
Cowen believes the increase of people in the US consuming cannabis is causing alcohol consumption to dry up. It says 18-25 year-olds are turning to cannabis because it’s seen to be less risky than alcohol. Brown-Forman and the Boston Beer Co have both recently added cannabis as a risk factor in their regulatory filings.
Conversely, the tobacco industry has an opportunity to capitalize on the trend toward consumption of cannabis through vape devices. Due to the tobacco industry’s regulatory expertise and consumer overlap, Cowen & Co predicts that it will represent up to 20 percent of the overall cannabis market by 2036, adding 20 percent of additional revenues to the tobacco industry.
Cowen also predicts an uptick for fast food and quick-service restaurants, citing Jack in the Box as an example of company that, due to the number of branches it has in states where recreational cannabis use is legal, is well posed to benefit.
Jack in the Box declined to comment.
