Cannabis stocks have failed to produce an investment high
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Highs are often followed by a comedown. Investors in cannabis stocks know the feeling all too well.
Marijuana was meant to be the next multi-billion-dollar industry after Canada legalised the substance for recreational use in 2018 and more US states moved to decriminalised its use. Valuations for pot companies exploded as investors clamoured to join the green rush.
Six years on, the sector has failed to live up to the hype. A market glut and a thriving illicit market have combined to undercut billions of dollars in revenue projections and hit shares in cannabis companies.
Canopy Growth, once Canada’s most valuable marijuana company, with a market capitalisation of $25bn at its peak, is now worth $800mn. Tilray Brands has seen its market value collapse from $10bn to $1.5bn. Shares in Curaleaf, the biggest cannabis company by revenue, are down 73 per cent from their highs. The stocks of three other major operators — Trulieve Cannabis, Green Thumb Industries and Verano Holdings — have respectively shed 82 per cent, 66 per cent and 84 per cent of their value since 2021. All in all, AdvisorShares Pure US Cannabis, the biggest marijuana-focused exchange-traded fund by trading volume and asset size, is down about 82 per cent from its peak.
Being lossmaking does not help. Of the six companies above, only Green Thumb managed to eke out a profit last year.
The problem for the cannabis industry is not the lack of demand. In the US, while the drug remains illegal at the federal level, it is legal for recreational use in 24 states and Washington, DC. Daily marijuana use in the US is now more commonplace than daily drinking, according to one recent study.
Instead the biggest buzzkill is the illicit market. In Canada and US states where cannabis is legal, sale and production are subject to extensive regulations, driving up costs. Illegal operators don’t have to pay taxes or compliance costs, allowing them to flood the market with low-price weed. In turn, legal producers and retailers are forced to keep prices low in order to compete.
Consumption could get a further boost if the US moves ahead with plans to reclassify marijuana as a less dangerous drug. Still reclassification is not the same as nationwide legalisation. Without the latter, the same dynamics will remain. Growers will find it hard to scale. Illicit growers will continue to put pressure on prices. Investors should not hold out high hopes for the sector.
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