A budding industry
Three and a half years ago, Canopy Growth Corp became the first cannabis company to list on a major stock exchange. It graduated from the TSX Venture Exchange to the Toronto Stock Exchange (TSX) in July 2016, taking the ticker symbol WEED. At the time, the company had a market cap of around $1 bn. As of late January 2020, the company boasts a market cap of more than $9 bn.
Commentators on the cannabis industry have likened the opportunity for wealth creation in a short period of time to the end of prohibition or the fall of the Soviet Union. Vivien Azer, managing director of consumer, beverages, cannabis and tobacco at Cowen & Co, was the first mainstream Wall Street analyst to champion the potential of the cannabis industry. In 2016 Cowen & Co predicted that the cannabis industry would generate $50 bn in sales by 2026. It recently updated this number, predicting that cannabis sales will exceed $75 bn by 2030.
Many other sell-side analysts in the US and Canada have followed Cowen & Co’s lead. For instance, Canopy Growth Corp is currently covered by 27 analysts – including representatives from Bank of America Merrill Lynch, BMO Capital Markets, CIBC World Markets, Jefferies, RBC Capital Markets, Scotiabank and the current leader in sell-side cannabis coverage, Canaccord Genuity.
Analysts are buoyed by shifting consumer sentiment toward cannabis. 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 a video published on Cowen & Co’s website. ‘There’s a broader appreciation now that it’s less addictive than alcohol.’
Source: Gallup and Cowen & Co
One strain of cannabis that is driving increased optimism for the sector’s potential is CBD oil, which can be used to treat a variety of ailments, such as anxiety, epilepsy and chronic pain. It can be consumed in a variety of manners, including through beverages, edibles and ointments. Nearly 7 percent of respondents to Cowen & Co’s 2019 consumer survey report using CBD as a supplement. Sales of CBD products in the US in 2018 are estimated to be between $600 mn and $2 bn, and Cowen & Co predicts that this number could rise to $16 bn by 2026.
The growth of the cannabis industry in the public markets is mirrored in – and likely caused by – a softening of cannabis laws around the world. Canada led the way, by legalizing recreational and medicinal use of cannabis in October 2018.
In the US, recreational use of cannabis is legal in 11 states and the District of Columbia, and is decriminalized in another 15 states. Medicinal use is legal in 33 states and the District of Columbia. All use of cannabis remains illegal at the federal level, however, creating challenges from a legal, compliance and risk perspective and posing restrictions on banking activity.
In Australia, medicinal use of cannabis is now legal and recreational use is decriminalized in several territories. In New Zealand, medicinal use was cleared in 2018 and there is set to be a referendum on legalization of recreational use in 2020. Medicinal use is also now legal in Belgium, Germany, Ireland – as part of a five-year trial – Israel, Italy, the Netherlands and a further 29 countries.
As a number of interviewees for this publication note, the growing international market for cannabis provides reasons for optimism, but the unique regulatory restrictions around production, distribution and usage in many of the countries listed above pose challenges for any company looking to expand its global footprint.
Despite the rise in analyst coverage and the lofty predictions for future revenue, there are many paradoxes at play when it comes to investor relations. As we will explore in this publication, there was a tremendous wave of money piling into cannabis stocks from retail investors, but institutional investors are still prohibited by law from investing in the majority of companies in the sector. For Todd Fromer, managing director at KCSA Strategic Communications, this is a source of anxiety.
‘When I look at the industry, I see parallels to the dotcom bubble-burst in 2000. At that time, investors completely overlooked traditional metrics. Everybody was in the mindset of trying to get as big as they could, as fast as possible. It’s one of the things that keeps me up at night, in terms of how quickly this sector has ignited,’ Fromer says.
Due to the prevalence of retail investors buying into cannabis companies, there’s a lot of noise and volatility in the sector; it’s not uncommon for public cannabis companies to release at least one press release per week. If they don’t, they fear they will become irrelevant. But if they do, they risk losing credibility with the watchful, and increasingly sophisticated, covering analysts.
In Canada, a paradox exists relating to the legalization of cannabis. While it’s legal to use the substance today, research from Scotiabank predicts that 71 percent of cannabis sales in 2019 took place on the black market. Oliver Rowe and Ben Isaacson, authors of the research, believe supply chain challenges, government inspections and quality control issues will result in most cannabis sales happening illegally.
Finally, in the US, there are companies that are generating millions of dollars in revenue, but could feasibly be shut down by a federal government clampdown tomorrow. All of this provides the background for what may be the most dynamic and complicated environment for investor relations in the world right now. The second half of last year brought a market correction that was challenging for many public cannabis companies, raising the question of whether they were overvalued and, if so, by how much. There’s still a lot of enthusiasm about the sector’s long-term prospects from prominent analysts like Azer, but there’s also an understanding that the volatility in the sector is unlikely to stabilize in the near term.
