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Is It Game Over for Medical Marijuana in Colorado?

Todd Campbell, The Motley Fool

Colorado's pioneering of recreational marijuana in 2014 may have led to a big unintended consequence with far-reaching implications: the destruction of the state's medical marijuana marketplace. Can medical marijuana and recreational marijuana coexist?

What's up?

Most states that have passed recreational marijuana laws started out by passing medical marijuana laws and Colorado's no exception.

A doctor writes on a notebook while holding marijuana buds. A marijuana leaf rests in front of him on his desk.

IMAGE SOURCE: GETTY IMAGES.

The state's medical marijuana market has been around since 2000, and it wasn't until 2014 that cannabis consumers were able to legally walk into a pot shop and buy marijuana for personal use without a medical marijuana card.

Now that marijuana's available to any adult who wants to buy it, it appears marijuana cards are becoming less important. Colorado recently updated its marijuana sales for 2017, and as part of its data dump, the state acknowledged that its medical marijuana sales had dropped last year. 

Specifically, medical marijuana sales in Colorado totaled $430 million in 2016 but only $420 million in 2017. That was the first decline in medical marijuana demand since the recreational market opened for business.

Why it's happening

It's probably not too surprising that while medical marijuana demand is slumping in Colorado, recreational marijuana sales are soaring. In 2017, recreational marijuana sales grew 30% year over year to $1.07 billion.

The slide in medical marijuana and rise in recreational marijuana may make sense. Applications for medical marijuana cards in Colorado can take anywhere from one to three business days, and if the application contains an error, it can take even longer. 

In order to get a medical marijuana card, individuals must have a qualifying medical condition, too. According to Colorado's Department of Public Health and Environment, the qualifying conditions that allow a person to get a card in Colorado are cancer, glaucoma, HIV or AIDS, cachexia, persistent muscle spasms, seizures, severe nausea, severe pain, and PTSD. That's a pretty comprehensive list, but it may be that many patients are avoiding an official medical diagnosis and forgoing the hassle associated with obtaining a medical marijuana card.

That has Matt Karnes of GreenWave Advisors thinking that medical marijuana cardholder data "will likely be indicative of further deterioration in medical market fundamentals."

What does it mean?

Medical marijuana is paving the way toward widespread acceptance of marijuana use, but it could be that the passage of recreational laws is shifting some medical marijuana users out of the healthcare system. That could be a bad thing if it means that patients stop getting primary care that can identify other health concerns or treatment options.

Nevertheless, Colorado's evolving marijuana market offers insight into how important recreational marijuana can be to state budgets. Colorado's combined $1.5 billion in medical and recreational marijuana sales produced $247.4 million in marijuana taxes, licenses, and fees in 2017, up from $193.6 million in 2016. That's not chump change.

So far, only eight states have passed recreational marijuana laws, but there are 30 that have passed medical marijuana laws in one form or another. As more states, like California, begin reporting significant tax revenue from recreational marijuana sales, however, it's a good bet that others will follow suit and put an end to marijuana prohibition.

That's good news for marijuana consumers and entrepreneurs in these respective states, but the U.S. market still presents challenges to marijuana investors. Because marijuana remains illegal nationally and Washington Republicans are jawboning for stricter enforcement, it's unlikely we'll see federal marijuana laws eased soon. 

Without reform at the federal level, the U.S. marijuana market will remain fragmented with few investment-worthy options trading on major market exchanges, such as the New York Stock Exchange. Instead, most of these small stocks will continue to trade over the counter on the pink sheets, which potentially subjects investors to a greater risk of fraud.

For now, investors interested in buying marijuana stocks should continue to focus on markets that are legalizing marijuana on the national level, including Canada. That country's expansive medical marijuana market is fueling revenue and profit growth for a variety of companies, including Canopy Growth (NASDAQOTH: TWMJF) and Aphria Inc. (NASDAQOTH: APHQF). These Canadian companies are investing heavily in their grow facilities and an expected opening of a nationwide recreational market this year has industry watchers thinking the market could double.

Canadian marijuana stocks aren't cheap, though. They've already attracted widespread interest among investors, and they're valued richly relative to sales and earnings. These stocks have a chance to grow into their valuations, but if you're concerned about paying up to buy them, another option is to buy a backdoor marijuana stock, such as Scotts Miracle-Gro (NYSE: SMG). While Scotts Miracle-Gro continues to get the bulk of its sales from fertilizer and pesticides, it's investing heavily in hydroponics and those products are increasingly accounting for a bigger share of its revenue. 

Overall, it appears that medical marijuana markets in states that have passed recreational laws will face a drop-off in demand. As a result, investing in companies that are solely focused on medical marijuana may not make the most sense.

 

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.