With a breathtaking year for cannabis nearly in the rearview mirror, investors are turning their attention to how the notoriously raucous sector will behave in 2019.
More reliable sales and revenue figures, new rules allowing edible and beverage sales in Canada, and growing support for legal adult-use markets in the United States are among the top trends to watch, according to experts who spoke to Yahoo Finance Canada.
Since the earliest public offerings, pot stocks at large have been cast as over-hyped and overvalued, not unlike the infamous dotcom bubble that saw today’s blue chip technology titans separated from the likes of Pets.com. Greg Taylor, manager of the Purpose Marijuana Opportunities Fund, sees clearer distinctions between winners and losers snapping into focus in 2019.
“I think the next six months or longer are going to be a little dodgy. For every one winner, you might have two losers. You are going to see some companies that just can’t deliver. They’re just going to fail,” he told Yahoo Finance Canada.
“At the same time, the space is going to go from companies that have massive market caps with no sales, to some companies with massive sales and EBITDA (earnings before interest, tax, depreciation and amortization) numbers.”
Bruce Linton of Canopy Growth Corp. (WEED.TO), a company with a market capitalization of about $14 billion that sold 2,197 kilograms and kilogram equivalents in its second quarter, warns his newer, smaller competition will face increasingly long odds in 2019.
“Everybody who’s just raising money right now, and beginning their build out so they can sell their first cannabis in 2019, is on a very challenging path,” Canopy’s founder and co-chief executive officer told Yahoo Finance Canada.
Asked if a Canadian cannabis company launched in 2019 could replicate Canopy’s trajectory, he said, “Regrettably, that opportunity is gone for Canada.”
Linton expects the most promising opportunities in the Canadian market will be around leveraging research from the country’s vast federally-controlled medical program, and development of advanced intellectual property.
The U.S. market – ‘You just can’t ignore it’
Stateside, efforts to end national cannabis prohibition are picking up steam, and the 2018 midterm elections saw more states pass medical and recreational legislation.
“This is the second year in a row where more than 50 per cent of Republicans now support adult-use legalization, with continued support for medical,” Cowen analyst Vivien Azer told Yahoo Finance Canada, referring to a Gallup poll released in late October.
Taylor expects a more liberal U.S. regulatory climate will open the door to mutual funds, pension funds and other big institutional investors, which will in turn smooth out some of the stock volatility.
Given the potential size of a fully-legalized U.S. market, he also anticipates big U.S.-listed producers will be anxious to gain a first-mover advantage south of the border next year.
Cannabis companies on U.S. exchanges are banned from having American operations because the drug remains illegal at the federal level in that country.
“You have to wonder when companies are going to say, ‘That’s all well and good, but the U.S. market is going to be the biggest in the world by far in a few years.’ You just can’t ignore it,” he said.
“I’m wondering when one of these companies is going to say, ‘At risk of losing our U.S. listing, or some banking relationships, we are going to run a big U.S. company and get in position for when that market opens up.’”
‘The year of the vape’
One of the biggest events on the horizon in 2019 is the release of Ottawa’s regulations for selling edibles, beverages, and other alternative forms of cannabis. The rules are expected to be unveiled sometime before Oct. 17, 2019.
Azer said the absence of edibles and other “novel form factors” played into her conservative view of the Canadian recreational market post-legalization. She points to the popularity of such products in well-developed markets like California, where items like vape pens and cannabis-infused sweets account for up to 30 per cent of sales.
Craig Wiggins, one-third of an independent analysis team called TheCannalysts, is dubbing 2019 the “year of the vape.”
“Grinding it up. Getting out a cone and stuffing it, or rolling it, is a ritual. But many people would prefer not to have crumbs of weed all over their coffee tables. They will go for the vape pen. It fits in your purse. It can slide into your pocket. It’s quick. It’s easy. It heats up immediately,” he told Yahoo Finance Canada. “Sucking combustion into your lungs isn’t a good thing. Vape pens are going to be everywhere.”
Canopy inked a $15 billion deal with beer and wine giant Constellation Brands Inc.’s (STZ) in August. Linton expects thirsty cannabis consumers will drive drink-based domination of recreational sales once a tasty beverage with a reliable buzz onset similar to booze gets developed.
“If we were able to figure out why we invented pottery, it’s probably because they need somewhere to store wine,” he said. “Drinks are the most social format.”
Grams for grandma?
Perhaps the most profound change pertains to how a formally illicit substance, and those who consume it, are judged by society.
For decades, cannabis has been tied to counterculture and crime. The stoner, hippie, pot head, and burnout stereotypes are still alive and well, even as pot continues to gain legal acceptance and attract billions of dollars from legitimate investors.
Linton sees beverages, vapor devices and other non-smoking forms changing the way people think about cannabis in 2019. The joint, he said, will always elicit images of characters like Cheech and Chong. He expects the number of smokers to shrink to as little as 10 per cent of the market in the next year or two.
Wiggins sees attitudes beginning to change as well, at least in Canada.
“When I say something like, ‘I’d rather have my three 20-year-old children responsibly using cannabis versus responsibly using alcohol,’ you don’t get the looks in Canada like you do in the states,” he said. “In the states, you look like you have three heads.”
As families gather for the holidays, he expects the cannabis crowd will get a slightly warmer-than-usual reception thanks to the developments of the past year.
“There are going to be discussions about cannabis happening over turkey dinners,” Wiggins said. “I can talk to my 96-year-old grandmother about cannabis. I’m trying to get her to take some for her migraines.”