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Why Cannabis Stocks Need To Go 'Beyond Flower'

Almost as soon as marijuana got the green light in Canada, investors were looking toward "cannabis 2.0" - edibles, concentrates, topicals, beverages.

This story originally appeared on Benzinga

Almost as soon as marijuana got the green light in Canada, investors were looking toward “cannabis 2.0” — edibles, concentrates, topicals, beverages. Bank of America analysts Christopher Carey and Lisa Lewandowski suspect that 89% of cannabis sector value is in these categories “beyond the flower.”

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It’s partly because these products are easier to scale than flower is. They also have higher margins. And, importantly, the category is where companies can differentiate themselves. In flower, brands don’t matter as much.

Despite the perceived importance of non-flower products, the companies in Bank of America’s coverage made about 69% of sales on dried flower and oil last year.

RELATED: It's A Buyer's Market In Cannabis Stocks, But The Game Has Changed Dramatically

“No company should be ‘dinged’ for reliance on flower in 2019,” Carey and Lewandowski wrote in a note. “Only M&A allowed some to diversify. However, all must go ‘beyond flower’ to survive in the long-term.”

That’s because the segment, they believe, is necessary for companies to win non-Canadian market share — a market share that can’t be overlooked.

RELATED: For Victims Of The Green Rush, What Lies Ahead?

“Valuation is full without international markets, which will become important at some point,” Carey and Lewandowski wrote.

By their assessment, Canopy Growth Corp CGC 5.15% is the only company investing enough funds in R&D to drive value beyond flower products. Its CA$21 million in R&D far outpaced the spending of the eight other cannabis companies in Bank of America’s coverage. Together, these firms spent just CA$16 million.

For more information on cannabis plays, check out coverage of the Benzinga Cannabis Capital Conference.