Background
In October 2018, Canada lead the developed world in legalizing recreational cannabis mail order marijuana. The only other country known to have done this is Uruguay. Following the legalization, stocks of the Canada’s main cannabis companies immediately skyrocketed. This was an impressive feat considering the industry was barely four years old.
Against this background, analysts warned that the rapidly surging stock price would be unsustainable. They said that soon the budding legal weed industry would experience a bubble.
Why the Warning?
Experts opined that the entire sector was being valued higher than what would normally be forecast for a mature market. Expected cannabis sales didn’t justify the then valuations of cannabis companies.
Compared to normal valuation for publicly traded firms, which roughly stands 10 times their earnings, several Canadian weed firms were valued more than 100 times and others more than 200 times their revenue. Investors largely disregarded the warnings and continued betting big on the sector.
Additional factors contributing to the failure of cannabis stocks in Canada
Expected Demand
The government had predicted an increased demand after legalization, from between under 400 to about 1,020 metric tons in 2018, to between above 400 to nearly 1,200 metric tons by 2021.
Analysts warned that these higher consumption rates, even if achieved would still not make the valuations of cannabis companies sustainable in the short to medium term. In reality, these consumption rates are far from being realized one year later.
Price and Variety
Sales have been slower than expected arising from asking consumers to pay almost twice as much per gram legally compared to the black market price. This has been worsened by less choice in terms of variety, as only oils and dried flower are currently stocked in the legal market.
The government plan to have enough variety such as vapes and edibles to replace products in the black market has not been realized yet, making consumers to keep looking in the illegal market which has variety.
Earnings Dismay
Investors have been disappointed with the performance of the cannabis companies. This has sent the stock prices for these companies tumbling.
Loss of Trust
There has been some regulatory breaches leading to investigation by police and regulators including suspension of cannabis licenses. This has resulted to questions of trustworthiness of cannabis companies and the capacity of regulators to properly undertake their mandate.
Conclusion
It seems the Canadian government has moved slower than expected and the cannabis companies have been too optimistic. Consumers would be delighted to get legal supplies of what they need. Government and industry stakeholders need to get together to strategize how to strengthen the industry or they lose out to the illegal market.