Growth markets must withstand the test of time before they realize their true potential. Between the year 2013-2014, the impact of the cannabis industry was perceived to be both a potential growth market and short-term hype.
And when the cryptocurrency industry began to weave itself into the investment philosophies of many, cannabis appeared to take backstage for a while only to re-emerge with a boom in the last few quarters. And now, cannabis has become once again one of the most promising industries in the stock market as highlighted by a string of mergers and acquisitions.
But what exactly has changed over the last few years to firmly confirm the cannabis industry as one of the best growth markets for stock investors? Well, everything revolves around legalization.
Globally, Cannabis has received at least one form of legalization in 40 countries with a gigantic chunk of that figure achieved over the last 5 years. In the US, medical cannabis is legal, in some form, in 33 states while recreational marijuana has been greenlighted in 10 states. And now, there is a great deal of expectation that it is only a matter of time before the U.S. Federal Legalization of cannabis takes place.
In fact, there is a bipartisan group of senators and representatives of the U.S. Congress that are trying to speed up things a bit. This group recently introduced the STATES (Strengthening the Tenth Amendment Through Entrusting States) Act, which will prevent the Federal government from intervening in states that legalize marijuana. The general view in the market is that this would effectively make marijuana legal at the Federal level in much of the U.S. thus paving the way for more states to embrace it.
If this happens and marijuana is Federally legalized in the US, it could result in an instant spike in annual sales in the cannabis industry according to a recent report by Barclays (LON:BARC). The report says that if Marijuana was legal in the US today, it would generate annual sales of $28 billion, which would stretch to over $40 billion within the next decade.
This estimate is backed by several figures. This has accelerated the consolidation phase in the cannabis market as companies look to pounce on the lucrative US cannabis industry. According to a report published last year by Substance Abuse and Mental Health Services Administration (SAMHSA), about 26 million people aged 12 years and above in the U.S. are users of Marijuana. A 2017 national survey revealed.
This statistic may not be most pleasing to the department of substance abuse and mental health, but companies investing in the cannabis industry will be looking at it as an opportunity that they can capitalize on.
This is why the U.S. is currently one of the hottest destinations for foreign marijuana companies looking to expand their addressable market. Some of them have focused on acquiring small startups offering specific products like recreational marijuana and cannabidiol (CBD) oils. But there have also been multi-billion dollar acquisitions and investments made in a bid to improve strategic positioning ahead of the expected boom in the industry.
Some of the highlight acquisitions of the last few quarters involved Canadian Cannabis giants Aurora Cannabis Inc (TO:ACB) and Canopy Growth Corp (NYSE:CGC).
Around mid last year, Aurora Cannabis acquired MedReleaf for $3.2 billion, which was at the time the largest acquisition in the history of the cannabis industry. This acquisition brought together two of the world’s largest players in the market in a vertically integrated business model.
Vertical integration has been the main focus in the consolidation of the industry with cannabis dispensaries being the most sought after by well-established players. Now, the combination of the two companies gives Aurora Cannabis a production capacity of about 550,000 kilograms of marijuana per year and a funded capacity of 650,000 kilograms through 2020.
This deal was the biggest in the industry until recently when Canopy Growth announced its plan to purchase British Columbia-based cannabidiol (CBD) focused company Acreage Holdings (CNSX:ACRG.U) for a reported figure of $3.4 billion. This gives Canopy Growth access to already legalized hemp CBD products market in the US.
And while the value of this section of the cannabis industry may be dwarfed by projections for the marijuana market, its legal status in the US and other markets across the world might be more lucrative to investors in the short-term.
This is the same strategy employed by another Canadian cannabis company Green Thumb Industries Inc. (CNSX:GTII), which acquired Las Vegas-based recreational marijuana dispensary company Essence Cannabis for a reported figure of $290 million. These acquisitions are happening all over the industry. And some of them like Aurora Cannabis have made more than one acquisition in the last few quarters.
In fact, even companies operating in sister industries like the makers of Marlboro cigarettes Altria Group Inc. (NYSE:MO) have joined the bandwagon. After making $12.8 billion investment in e-cigarette maker Juul for a reported stake of about 35%, Altria has now turned its attention to the marijuana market. The company took a 45% stake in Canada-based Cronos Group Inc (NASDAQ:CRON) after committing $1.8 billion investment as it continues to expand its empire in the smoking business.
Alcohol brewing companies, soft drink makers have also shown interest in the rapidly growing cannabis industry, which again highlights the diversity of industries that are looking to infuse some of their products with cannabis extracts.
Clearly, with US Federal legalization presumably around the corner in addition to the global progress shown in a number of countries that have already embraced cannabis, the future looks a lot brighter for the industry.
The US will account for the largest market share if marijuana is legalized at the Federal level and this explains why every company wants to position itself in readiness for this key milestone.
Conclusion
In summary, the global cannabis market is beginning to take shape with several countries already embracing at least one form of cannabis use (medical marijuana, CBD oils, or recreational marijuana, among others).
The U.S. is potentially the largest single cannabis market in the world but lack of Federal legalization has held back its growth. Now, it looks like legalization is close, which is why investors are getting excited about the U.S. cannabis market.