For Industry Investment, 2018 Was Terrific But 2019 Looks Even Better

By J.J. McCoy, Senior Managing Editor, New Frontier Data

It may be taken as a given that in the recent past speculators and stakeholders alike have watched a veritable comet’s arc in collective investment amid the cannabis space. An industry worth $910 million in 2015 reached $13.8 billion in 2018, and it seems bound only sunward yet: The bottom line is, the sky’s the limit.

The market has vast potential for generating future profits. It has not yet been six months since Canada activated its nationwide adult-use program, though the industry has meanwhile grown massively, welcoming companies and investment from quarters previously thought unimaginable to have any involvement.

For now, the leading quartet of companies – Canopy, Aurora, Tilray, and Cronos – which are exclusively involved with cannabis seem likely to reach newer heights of valuation even as they combine to lose vast amounts on an operating basis. Even if not simultaneously so, each of those popular, brand-name cannabis stocks seem poised to turn inexorably toward profitability.

Given its capacity for a reported 700,000 kilos (1.54 million lbs.) in peak annual output, Aurora Cannabis represents Canada’s largest producer, a position which makes it seem likeliest to be first in becoming profitable on an operating basis (i.e., without aid from one-time benefits or fair-value adjustments).

With friends like Altria (and its $1.8 billion equity investment), Cronos may also cruise toward profitability if for other reasons. Whereas Aurora has more than a dozen production facilities to operate, Cronos’ profiteering agility stems from its advantage of running but two major production facilities (its joint venture Cronos GrowCo and Peace Naturals) and keeping costs down while it implements its margin expansion through sales of alternative cannabis products.

Tilray was the first cannabis company to make an initial public offering on the NASDAQ, and it has been capitalizing on lucrative opportunities through partnerships with companies like Anheuser-Busch InBev and Novartis. But earlier this month Tilray’s CEO commanded headlines by alluding to an oversupply situation soon coming to Canada, and asserting that Tilray’s long-term strategy is more about the European and U.S. medical marijuana markets than in Canada’s much smaller respective market size.

Meantime, most of the overall market growth this year will expectedly derive from Canada’s settling in with its adult-use sales, while in the U.S. folks will impatiently abide California’s muddling through its early missteps in establishing its own adult-use market and supply chain.

Some on Wall Street have thrown some shade that Canopy will not turn a profit until 2021, but by any other measure it is clearly enjoying a rosy view: Being the second-largest producer – with a reported peak annual output of 500,000 kilos (1.1 million lbs.) sitting atop a summit of cash totaling more than $4 billion handed them by Constellation Brands has a way of brightening one’s outlook. Meanwhile it will be restless to deploy some of that capital to efficiently corner some of the Canadian market share, prepare a blitzkrieg on both the American beverage space and hemp market, and to expand overseas as programs come online for more export opportunities.

Obviously, the recent rise of the legal cannabis industry has been nothing short of remarkable, and the momentum enjoyed in 2018 has lent impetus to what has so far been seen in 2019. Yet, as individual states’ respective interests lead the United States federal government further toward the tipping point for nationwide legalization, and more global jurisdictions look to eliminate prohibition throughout the world, those aforementioned blue skies are looking ever closer within investors’ reach.