Why Big Investors Eying $194 Billion Market Are High On Cannabis
BY MARK KOLAKOWSKI, INVESTOPEDIA
Big institutional investors are getting increasingly high on the growth potential for products derived from the cannabis plant, more commonly known as marijuana. Bank of Montreal, in a decidedly bullish forecast, says the market could be as a large as $194 billion worldwide by 2025, should the U.S. federal government legalize cannabis, Business Insider reports.
Growth like this would further boost cannabis stocks and spur more entrants. A long list of cannabis-related stocks already trade on North American exchanges and include Cronos Group Inc. (CRON), Aurora Cannabis Inc. (ACB), Canopy Growth Corp. (CGC), and Tilray Inc. (TLRY).
Significance For Investors
What's striking is how rapidly cannabis investments are being embraced by Wall Street and other areas. In a poll of 120 senior executives at leading private equity, venture capital (VC), hedge fund, and other institutional investment organizations, almost 33% said that the cannabis industry has the greatest growth potential this year, a close second behind technology, according to accounting firm EisnerAmper, which did the survey. The most bullish were hedge funds, with 37% putting cannabis in first place, per BI.
So no wonder that money is rushing into cannabis investments of all kinds. Already, the combined market value of public cannabis stocks trading on U.S. and Canadian exchanges has ballooned to tens of billions of dollars. Also, venture capital firms invested $1.3 billion in 150 cannabis-related deals in the first half of 2019, already outstripping the $1 billion in VC money spent in all of 2018, VC deal monitor Pitchbook calculates, per BI. Private equity firms also have jumped in, investing $474 million in 19 cannabis-related transactions during 2018, and are investing at an even faster clip in 2019, according to the same sources.
As recently as 2012, cannabis was illegal virtually everywhere in the U.S. Today, despite still being banned by the federal government, 33 states have legalized medical marijuana and 10 states permit recreational use by adults, Barron'sreports. Other states, too, are moving toward legalization of recreational use. New York City is a notable jurisdiction where state laws against recreational use go largely unenforced, and pot is smoked openly in public.
Moreover, the non-intoxicating chemical in the cannabis plant, CBD, also is seeing explosive sales growth. It's touted as a health and beauty aid, sold by an increasing number of mainstream retailers. Unlike CBD, THC is the intoxicating compound that remains a federally-controlled substance.
Cannabis technology firms are an increasingly important niche within the industry, observes another BI report. These companies support the cannabis industry with hardware, software, data analytics, and cultivation technologies, while also offering consumer devices such as vaporizers. Since cannabis tech firms do not grow, process, distribute, or sell cannabis products themselves, they technically do not violate U.S. federal controlled substance laws.
Cannabis tech firms include LeafLink, Headset, and Treez. All have financial backing from a variety of private equity and VC firms. LeafLink operates an online platform that streamlines the wholesale distribution of cannabis products. Headset has deals with accounting and consulting firm Deloitte, as well as market research company Nielsen, to provide data analytics regarding the cannabis industry to leading packaged goods companies. Treez designs software for cannabis retailers.
To be sure, cannabis is a young and unproven, thus risky, industry. Barron's warns that many startups are burning cash, and are far from establishing track records of profitability. Given the disruption and turmoil that occurs in young industries, many cannabis investments are likely to fail as others generate unimaginable profits.