Canada legalized recreational cannabis on 17 October 2018, but the “Green Rush” has yet to occur.
Investors aren’t seeing the predicted rewards as the black market continues to thrive.
Investing in the Canadian Cannabis Market
In 2018, when Canada launched its legal cannabis market, everyone from well known investors to top celebrities scrambled to take part. Snoop Dogg’s participation hardly came as a surprise, but the head of the police force of Toronto – the largest city in the country – raised eyebrows when he chose to invest as well.
It was as though everyone saw the potential of this multi-billion dollar industry and they each wanted a piece. However, despite widespread predictions of skyrocketing stocks, the market simply didn’t take off as expected, and over a year later, it still hasn’t. This has left investors and analysts trying to find out what exactly went wrong.
Failing to Perform as Predicted
“It didn’t take a rocket scientist to recognise that these stocks were trading on fantasy and not on fundamentals,” explained New Leaf Data Services CEO, Jonathan Rubin in a recent BBC report. Rubin’s experience over the last decades lies primarily within energy commodities markets.
He watched as California and Colorado legalized cannabis in the United States, and as Canada followed shortly afterward. He saw this as a “once in a lifetime” opportunity to participate in a new commodity at its inception. “I had this epiphany that this is going to be a commodity just like any other commodity,” he said in the report. He launched New Leaf to track legal cannabis markets.
Canada’s Cannabis Vision Wasn’t 20/20
Investors expected Canada’s legal cannabis market to explode right from the start. However, as Rubin explained, sales and earnings growth simply haven’t occurred at the predicted rate. “I don’t want to say it’s a failure, but there’s definitely frustrations.”
Wholesale prices have been slowly but steadily falling, keeping profit margins for producers at a slim level. Moreover, according to the Canadian government’s official data collection agency, Statistics Canada, sales are also slowing.
The result has been highly volatile stock prices for publicly traded cannabis companies. For instance, Canopy Growth, the first marijuana to list on the New York Stock Exchange (in May 2018) doubled its price in six months from its IPO. However, since that time, its price has slipped right back down to where it started. Its rivals have experienced nearly the same trend.
There are several reasons the cannabis market isn’t living up to investors’ hopes. Among the most damaging was a greatly underwhelming roll-out from the start. Though consumers were very interested in shopping on 17 October 2018, the supply wasn’t nearly great enough to meet the initial demand.
From the start, consumers were put off by long wait times and online order backlogs. Supply chain issues were widespread and producers limited production at the beginning as they weren’t sure which strains would prove to be popular. Those same supply chain issues have yet to be entirely cleared.
Exacerbating those issues was a messy collage of provincial laws, making it more difficult for producers to make sure their products were reaching consumers. In some locations, shopping was simple and seamless. In others, it was nearly impossible.
This was particularly problematic in Ontario, the most populous province in the country. A retail cannabis outlet cap combined with extensive red tape slowed the rollout nearly to a halt. A lottery method was used for awarding retail licenses and only 24 were issued to serve the 14.5 million person population.