The cannabis industry has emerged as a promising sector in the world of investing in recent years. With the ongoing legalization of medicinal and recreational cannabis in several countries, the industry is experiencing unprecedented growth. Yet, these companies are struggling and are rarely profitable. What are the developments in the industry, and is it interesting to invest in cannabis stocks?
Risks of investing in cannabis
According to reports, the growth potential of the cannabis market is extraordinary. But alongside the promising prospects, there are also risks associated with investing in the cannabis sector. These include ongoing regulatory uncertainty, market volatility, and competition from both existing and new players.
Investing in the cannabis market requires a high-risk profile. All forecasts for the development of the cannabis market in the coming years are still surrounded by high uncertainty. Neither supply development nor actual consumer demand can be reliably estimated. The industry's high expectations are unfulfilled for the time being. Increasing competition or changing legislation could lead to considerable volatility.
Reducing costs
Consolidation in cannabis markets is necessary for survival. Almost all companies made losses, and fierce competition is putting pressure on margins. Acquisitions and mergers can create economies of scale that can lead to more efficient processes and lower costs.
The year 2021 was dominated by mergers and acquisitions. For instance, GW Pharmaceuticals was acquired by Jazz Pharmaceuticals for $7.2 billion. Aphria and Tilray merged, and Trulieve acquired Harvest Health and Recreation for $2.2 billion.
From the manufacturing side, Canada and the Netherlands face competition from warmer countries. Increasingly, regions with warmer climates, cheaper land, and cheaper labor, such as Latin America, the Mediterranean, and Africa, are seeing cannabis as an interesting export product. Moving production to these countries can also improve profits.
Investing?
The cannabis market is developing as expected: after the huge hype, the industry is currently separating the wheat from the chaff. Many companies are in a restructuring phase marked by acquisitions and mergers. Several companies have also appointed new CEOs.
While companies like Aurora Cannabis are clearly struggling to survive, other market players like Canopy Growth and Cronos are managing to keep growing.
For Canopy and Cronos, the billions invested by Constellation Brands and Altria were certainly crucial. The cash buffers, at least partly still in their bank accounts, could prove to be a decisive competitive advantage in the long run. Even as cannabis stock prices have collapsed and are low, increased volatility in this sector can be expected. This is mainly due to the relatively high uncertainty and the fact that the companies do not operate profitably. "If you really want to make such a highly speculative investment, you should ensure that the company has sufficient financial cushion to offset expected losses until profitability is around the corner," according to Lynx.
Source: lynx.nl (NL)