Observers believe that marijuana investors are not looking at the whole picture. They are chasing an illusionary image of cannabis as ‘the ultimate gold rush.’
A professor of economics at Queen’s University has cautioned investors, who are having high expectations over the growth and profits coming from the much-anticipated cannabis legalization nationwide in Canada.
In an Op-Ed to Maclean’s – considered to be the Canadian version of the U.S. economist magazine – Allan Gregory wrote: “As in many stock market interactions, the industry tells a rosy story of growth and opportunity.”
Instead, Gregory reminded his readers of the “dot come bubble,” giving his “somber warning.”
“Canopy Growth Corp. is currently valued at just over $7.5 billion yet loses about 12 cents a share. At the same time, Canadian Tire Corp. has a valuation of $11.5 billion and earns $10 a share—and pays a dividend yield of 2.14 per cent. What company offers a better long-term investment?”
Canopy is the first federally regulated, publicly traded cannabis producer in North America, traded on the Toronto Stock Exchange as WEED.
In Canada, Aurora and rivals Canopy Growth (WEED.TO ) and CanniMed Therapeutics (CMED.TO) are competing heavily for market share.
The new year started with the green rush taking full effect, with Canadian weed shares soaring as the federal government prepares to legalize marijuana nationwide this summer. Licensed producers (LPs) are also upping their production and refining their methods in-time.
“On Monday alone shares in Canopy Growth Corp., soared nearly 20 percent,” wrote Gregory, but the “the surge in market value comes as firms try to position themselves with sufficient product to meet anticipated demand.”
The professor said it is not “difficult to predict profit margins,” and the “current market cap valuations are predicated on unrealistic expectations.”
He said these companies have not generated profits.
In Ontario and Quebec, where marijuana companies will be modeled after their government-controlled alcohol counterparts such as the Ontario Liquor Control Board (LCBO) and Société des alcohols du Québec (SAQ), the picture looks bleaker as to “why marijuana producers face tough times ahead.”
He said there is a “false belief” that marijuana LPs “will get the same price from the provinces they have enjoyed in the retail-based medical market business.
“Aggressive bulk buying” by the government “will whittle the producer price down markedly,” most likely making “the largest producers” as the sole ones, who “will be entering into a contract with the provincial authorities.”
This will fizzle down “the notion of boutique suppliers of cannabis,” who “will have to wait, just like craft beer producers waited in alcohol sales.”
LCBO and SAQ have a monopoly over the sales of alcohol. He said the wine industry is the best industry to compare the future marijuana industry with.
“The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect,” he said, citing a recent study on Ontario Wine and Grape Industry (2015), where they found out “for large-scale operations the profit margins are just under 15 percent and in fact many smaller vineyards were posting losses.”
Lack of Certainty
While the professor gave his own projected prognosis of the marijuana industry’s future profits as an economist, people in the marijuana industry also do admit a lack of certainty but somehow show a lot of confidence.
“There are still a lot of unknowns,” Neil Closner, CEO at MedReleaf Corp., has previously said.
MedReleaf is a Licensed Producer of premium cannabis-based products.
So far, it seems that investors are evaluating stocks not on what the companies have sold to their patients, but on how much they may be able to sell in two or even three years.
Closner said execution risk has not be accounted for. He says,
“WHAT APPEARS TO BE THE CASE IS THAT THE MARKET IS VALUING COMPANIES ON TOTAL ANNOUNCED PRODUCTION CAPACITY. PERIOD. IT DOESN’T TAKE INTO ACCOUNT THAT THEY MAY NOT BE ABLE TO DO IT. THERE’S NO EXECUTION RISK BEING FACTORED IN.”
Jay Wilgar, CEO at Newstrike Resources Inc., also said that investors are not weighing in all the factors.
Newstrike the parent company of UP Cannabis Inc.
Wilgar said investors and analysts focus far more on how products are marketed and less on square footage.
He likened it to the beer market when he said ale producers do not “brag” about how much land they have, but it is all about marketing.