The cannabis industry, a market outlook for the next 10 years
Investors around the world have shown increasing interest in investing in the industry anticipating excellent returns.
By Diego Magallón, financial advisor to Canncura
In recent years, support for the inclusion of the cannabis industry has been on an upward trend, as evidenced by the increase in markets where there is some type of legal framework for medicinal, industrial and recreational applications. Sure, you have heard about the income generated by companies and governments, as well as the market value projections for the next few years.
Investors around the world have shown increasing interest in investing in the industry anticipating excellent returns. We believe that it is important to have an opinion formed with a solid frame of reference, so we share our market perspective for the next 10 years.
As investors, it is worth remembering that the cannabis plant has different molecules to what we call cannabinoids, it is worth mentioning that the increase in research budgets around the world has generated knowledge of new cannabinoids, in addition to THC and CBD, with different applications as is CBN which shows properties to fall asleep. Without a doubt, this will continue to evolve depending on the resources and attention devoted to getting to know the plant.
A) From legalization to experience
To understand where we are standing we have to know the history of the plant through time and the interaction it has had with civilizations.
Let us take the last 50 years as a reference window, where gradually for more than 20 years we have gone from a global ban to a legalization process in different parts of the world, in which we enter a period of accelerated legalization that will lead us to have a global cannabis market similar to any global industry.
This means that in terms of consumer habits, most of the market is in the process of discovery, as is the product offering, which is just beginning to explore different methods, applications, and preferences in different markets .
Observing what happens with consumer products, we can assume that the trend is towards experiences, as is the case in the wine, food, and alcohol industry. Taking a specific look at the alcohol industry when it went from prohibition to legality, we can assume that the transition from product discovery to experience happens exponentially in an accelerated curve. Which will lead us in the coming years to find products or services with a vision of experience. We believe that a business model that includes this approach in its thesis is being sensitive to the evolution and interaction of the market with the plant.
It is important to mention that comparing the alcohol consumption industry with that of cannabis is not the correct thing to do, since the former does not represent industrial, medicinal or wellness-related applications. The most comparable from our perspective is the recreational part in terms of the possible behavior of the market in its different segments.
B) The case for investing in the cannabis industry
Regardless of the way in which we decide to invest in the industry, remember that it can be live, on the stock market (stocks, ETF's), in investment funds or in companies that serve the industry. There must be a good argument in favor to make the decision.
There are arguments as to which part of the supply chain should be entered based on: returns, scalability, risk, regulatory factors, etc. The reality is that regardless of the part of the chain in which it is decided to invest the main assumption of most of the strategies, is the potential growth of the market.
There are published studies in which it is anticipated that the global cannabis market will grow 5 times between now and 2023, taking the example of markets such as Canada and projecting them to markets such as Germany, the United States and Mexico.
Under this narrative, investors who know how to choose well will undoubtedly enjoy good returns in the coming years.
C) The argument for NOT investing in the cannabis industry
In our perspective there are two narratives that support why not invest in the industry right now. The first is that the growth projected by analysts will not be achieved in the times they anticipate, and the second, specifically speaking in the shares of the stock market, is that this growth is already discounted in the valuations of the companies via the price of their shares. . One argument that supports this narrative is that the US government will not open the market federally soon, which is why companies will not be able to operate at the federal level and will continue to have regional presences.
There is a risk in market dynamics that could cause that, if the projected growths occur, but that the companies in the industry fail to capture the benefits, since the growth occurs in the gray or informal market.
D) Expected volatility in prices per ounce of raw material
As investors we must analyze the possible behavior of the price of the raw material in any of its applications: recreational, medicinal and industrial. For this analysis we believe that we must distinguish between the industrial market and the recreational and medicinal markets.
In the industrial market the tendency is for prices to stabilize in a pure supply and demand dynamic. Where the fiber from the plant is seen as a raw material for different industrial processes and the added value is created at another level of the supply chain.
In the recreational and medicinal market, the perspective changes since the user has the expectation that the products in any of their presentations will have a performance.
This allows creators of consumer products in these categories to generate added value through sensations and characteristics that meet any need. This may result in very wide price bands where the value of an ounce is a function of the value it generates for your market.
Currently in the United States market and derived from the stage in which we are (accelerated legalization), we can observe market dynamics that show volatility in the price caused by imbalances in supply and demand, mainly in recently legalized markets where the Demand increases and supply is limited to legislative and regional production times, resulting in a channel unable to meet demand.
E) Value generation in the cannabis industry
It seems important to us as a business strategy and as investors in any industry, to understand where added value is generated and to recognize that as an industry develops, value is generated at different stages of the chain.
What we have observed in recent years of gradual legalization is that the added value was initially generated simply by having product availability in a legal framework with or without any other specific requirement.
Today, we can analyze more advanced markets in the legalization process such as the markets of Canada and California where we can already observe established consumption patterns.
We observe consumption behaviors that are replicated in other industries such as the category of artisanal cannabis similar to the craft beer market. We also have the case of topical products that meet the need for well-being and become directly substitutes for well-established products in the skin care industry, among other behaviors.
Regardless of the value generation strategy, we believe that data analysis leveraging technology is a factor that will be very important so that industry players can make accurate and informed decisions in a market with relevant regulations where policy compliance is essential for business continuity
Invest or not?
In the next few years there will undoubtedly be companies that manage to capture a market and become excellent generators of profits, however, there will also be companies that fail to take off and only result in losses.
Investors in the industry must know the risks associated with the business, as well as be calm in moments of volatility derived from accelerated growth and structural changes that may occur in the next 10 years.