Cannabis is one of the last industries with the highest growth and with the most opportunities. Canada legalised cannabis in 2018 and 11 U.S. states have also allowed it in recent years. Legalization in this state has quickly created shortages of cannabis in light of the high demand, a real boon for cannabis businesses and merchants. While Canadians have been able to invest in the medical cannabis sector since 2017, it was previously impossible in Europe. That recently changed, with Canadian firm Purpose Investments launching an index mutual fund (IMF) called Medical Cannabis and Wellness.
The year 2020 has been historic for cannabis. More and more cannabis businesses broke even, if not profitable. Instead of slowing down the industry’s expansion, the impact of COVID-19 accelerated sales, in an environment where people were staying home. In the United States, we have also seen many states approve (or expand) the legalization of cannabis. Starting with Illinois in January 2020, followed by five other states in last November’s election.
CANNABIS : STATE OF EVOLUTION
Cannabis is subject to different legislations in different countries of the world. First of all, it is important to distinguish between two types of cannabis use
In the United States, 11 states out of a total of 50 have legalized the recreational use of cannabis: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, and most recently, Illinois.
In recent years, the use of recreational cannabis has also been “decriminalized” in many American states, as demonstrated, for example, by the case of the state of Hawaii, where the use of cannabis remains illegal, but a law has been in place since January 11, 2020, allowing the possession of up to 3 grams of cannabis. Some American politicians are campaigning for its complete decriminalization on American soil.
Concerning cannabis in the rest of the world, Canada has authorized it since 2018, as well as South Africa and Uruguay since 2013.
In short, cannabis is becoming legal in North America (United States and Canada) but its authorization remains marginal in the rest of the world (only in Uruguay and South Africa).
Cannabis for therapeutic use
The therapeutic use of cannabis is somewhat more widespread and is authorized in Israel, Switzerland, the Netherlands, Italy, Germany, Poland, Thailand, South Korea and some American states.
Cannabis is “technically” illegal but tolerated
There are also special cases, such as the Netherlands, where the law prohibits it only “technically” because its sale and consumption are tolerated, although its use may be regulated in public places. The same is true in countries such as Belgium (possession of this drug is tolerated up to 3 grams), Germany (the tolerance threshold is set between 6 and 15 grams) and Portugal (where the tolerance threshold is set at 25 grams).
The democratization of cannabis
The democratization of cannabis, particularly in North America, opens up new prospects for cannabis companies. Indeed, the weight of this market is currently estimated at $10 billion in the United States and $17.7 billion worldwide.
According to “Newfrontierdata.com”, the annual growth rate of the cannabis market is expected to be +14% per year by 2025. The growth prospects are therefore very real and could be even higher if legalization were to be extended to new countries.
It should also be noted that the legalization of cannabis represents an influx of money for the governments that tax this product and thus benefit from tax revenues.
A series of mergers and acquisitions in 2020/2021
Since the beginning of the year, investors have felt the effects of this consolidation in a series of large transactions – often valued at several hundred million dollars – involving well-known players.
There was the formalization of the marriage between Tilray and Aphria, while players such as Canopy Growth and Hexo, the producer that was once based in Gatineau before moving its headquarters to Ottawa, did not remain on the sidelines.
As a result, a handful of large producers are making their way to the top. According to a recent report by Desjardins Securities, Canopy controlled about 14.0% of the Canadian market behind Hexo at 17.0% and Tilray at 15.5%, but ahead of Aurora Cannabis at 6.5%. With the exception of Aurora, all three companies are listed on the Toronto Stock Exchange.
Aphria (NASDAQ: APHA) is buying U.S. craft beer brewer Sweet Water Brewing with the prospect of using the company to produce cannabis-infused beverages. This also gives the Canadian a foothold in the U.S. to get off to a flying start once he can legally operate there.
And, now, Aphria has just announced a merger with Tilray (NASDAQ: TLRY), another major cannabis operator. By joining forces, these two companies will become the largest cannabis company, dethroning Canada’s Canopy Growth (NASDAQ: CGC).
Is it worth investing in cannabis companies?
Operating in an industry expected to grow by an average of 14% between 2020 and 2025 is a boon for cannabis companies.
The trend in recent years has been towards the legalization of cannabis, especially in North America. If other countries in the world decide to legalize it, the prospects for the cannabis market would be even more interesting.
According to the media “Geneva Business News”, the global demand (legal and illegal cannabis) amounts to 344 billion $, distributed as follows:
North America: $86 billion
Latin America: $10 billion.
Europe: $68 billion;
Africa: $37 billion;
Asia: $133 billion;
Concerning the therapeutic use, the demand is also vigorous with 1.2 billion people suffering from diseases that can be relieved by the use of cannabis.
The investor who decides to become a shareholder of companies in the cannabis sector therefore benefits from a long-term growth market.