Looking at Investment Trends at the End of Q3-19

by New Frontier Data

Explosive growth in the legal cannabis industry has drawn increasing attention from investors and companies in a range of industries interested in capitalizing on opportunities within the sector. Such growing interest from corporations and individuals outside of the sector will be vitally important in increasing the legitimacy and professionalism of legal cannabis, funding sector-wide innovation, and increasing corporate and industry efficiency to reflect mainstream businesses practices.

This week’s CannaBit infographic illustrates a two-year comparison of year-over-year growth by 10 of the top companies in the legal cannabis industry.

As examined at length in New Frontier Data’s forthcoming U.S. Cannabis Report: 2019 Industry Outlook, sectors currently attracting the most attention in North America include banking and finance, pharmaceuticals, agriculture, alcohol, and professional services. As legal state markets have begun to mature, and as momentum continues to build for national cannabis reform, investors have shown increasing willingness to assume greater risk (and make larger investments) to capture a first-mover advantage in a high-opportunity industry that is still highly fragmented with relatively few large players.

Cannabis stocks have enjoyed a boon over the last few years amid growing corporate investments, high enthusiasm among retail investors, sweeping political reform, and international expansion of legalization. However, the fevered Green Rush has recently cooled as exuberant outlooks are replaced by more pragmatic views grounded in business fundamentals and long-term planning.

The top 10 current largest cannabis companies have a combined $42.8 billion in market capitalization as of September 2019, a 2% decrease from the previous year. The market caps for market leaders, Tilray and Aphria have fallen over 50%.

In 2019, investors began to recalibrate their expectations as talk around federal legalization slowed, earnings estimates have been missed, and key markets like New York and New Jersey failed to advance legalization measures. This loss of momentum in federal policy reform, with concerns about the time required for companies to recoup their significant investments, combined with a litany of investment risks (including the recent vape crisis), have led to a substantial sell-off across the sector.

Among the top 10 largest cannabis companies by market cap, 70% experienced a decline in their stock prices since the beginning of 2019. Canopy Growth Corp, the largest of the Canadian producers, is down $1 billion in the three months through September 2019, having made unexpected headlines with the unceremonious ouster of its CEO and chairman, Bruce Linton, who had established himself as one of the industry’s most forward-leaning figures.

The move was characteristic of an industry historically dominated by small, local players, now being absorbed by larger, publicly traded companies with multistate, and multinational operations.

Over the first eight months of 2019, nearly 400 capital raises and just over 240 M&A deals have taken place in the cannabis sector. Capital raises YTD have totaled nearly $10 billion, with infused products and extracts becoming a strong focus for investment due to the high growth in popularity and revenue share in legal markets where concentrates and extracts are approved product forms.

After years of inflated exuberance, the decline in share price across the sector suggests the market is taking a more realistic view of future growth.  This recent market contraction, however, contradicts other important growth catalysts such as increasing public support for legalization, state, and international markets continued expansion, and the growing breadth of health and wellness applications, driving more consumers to novel ways of integrating cannabis into their lives.

The long-term opportunities presented by these developments are reflected in the continued capital flow into the sector. Over the first eight months of 2019, nearly 400 capital raises and just over 240 M&A deals have taken place in the cannabis sector. Capital raises YTD have totaled nearly $10 billion. Infused products, concentrates, and extracts are becoming a strong investment focus due to their growth in popularity and increase in revenue share in markets where they are legal.

The past week alone underscores the range of ways in which the sector continues to gain traction: cannabis made its debut at New York Fashion Week, one of the world’s largest pharmaceutical companies announced its first cannabis deal, and House leaders promised a vote on a cannabis banking bill this month. Investors may be taking a more sober approach to the market, but they continue to see strong momentum and rich opportunities ahead.

It will be interesting to see the extent to which any potentially forthcoming, larger economic slowdown impacts the cannabis sector (both in the U.S. and abroad) in the way such downturns traditionally impact industries such as alcohol, which tend to be relatively impervious, and even embrace opportunities for adaptation.