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A Beginner's Guide to Understanding the Cannabis Market

The cannabis industry is booming, supported by increasing legalisation and an influx of capital from venture capitalists and other investors. In recent years, the opening of the medical cannabis market has progressed rapidly not only in North America but also worldwide, resulting in a long list of start-ups, IPOs and also a wave of cannabis-related mergers and acquisitions involving production, distribution, real estate, retail and other businesses.

In less than a decade, marijuana has gone from being illegal to legal (at least to some extent) in more than half of the U.S. states and Canada. Since then, the increasing decriminalization or legalization of cannabis and/or its components around the world is driving the market. The value of the marijuana industry is expected to double by 2025, to $56 billion, creating a host of new opportunities for entrepreneurs and existing businesses are growing, Depending on your investor profile and portfolio needs, the cannabis industry offers a wide variety of investment opportunities in stocks, ETFs and REITs. But as with any niche or emerging industry, investors need to be aware of the risks, do their research and implement an asset allocation and diversification strategy to absorb the inevitable volatility of the sector.

Key statistics

  • Global legal cannabis sales are expected to reach $56 billion in 2025, according to New Frontier Data.

  • In 2022, total legal cannabis sales for medical use is estimated to be $14.7 billion globally. Legal cannabis sales for adult use are estimated to be $22 billion globally.

  • 420 cannabis stocks and ETFs were listed globally in 2021

  • The Cannabis Market is expected to grow at a CAGR of 26.19% in the 2021-2028 years. (Vantage Market Research)

  • North America is the region with the highest growth rate ( CAGR) over 2021- 2026.

  • North America had the largest share of the cannabis market in 2021.

  • Market Snapshot: Over 100 companies are operating in the cannabis market. Canopy Growth Corp., GW Pharmaceuticals PLC, Aurora Cannabis Inc., Aphria Inc., Tilray are the major players.

Market Snapshot 2017-2027 (Source: Market Intelligence)

A brief overview of the marijuana industry

The Global Cannabis Market is segmented by Product type (Capsules, Concentrates, Edibles, and Other Product Types), Application (Medical and Recreational), Compound Type (Tetrahydrocannabinol (THC), Cannabidiol (CBD), and Balanced THC & CBD ), and Geography.

  • Cannabis companies fall into three broad categories: Marijuana producers and retailers grow, package and sell cannabis products to consumers. Biotechnology companies develop and market cannabis-based medicines. Marijuana ancillary businesses provide products and services to cannabis businesses.

  • Cannabis can be medical or recreational: Medical cannabis patients use cannabis or cannabis extracts to treat health problems when prescribed by a physician. Recreational cannabis users 18 years of age and older purchase marijuana or cannabis extracts solely for pleasure in a jurisdiction where recreational use of the plant is legal.

  • Geography matters: Medical cannabis is legal in many more countries than recreational cannabis. In the U.S., cannabis remains illegal at the federal level. However, several states have legalized medical and/or recreational cannabis. Canada is one of the global legal markets where supply is outpacing demand and leading to falling cannabis prices.

Biggest Challenges for the Cannabis Industry in 2022

While in the long term there is definite potential for the cannabis market as a whole to establish itself as mainstream business and industry, in the short to medium term the prospects are more questionable, to the extent of the industry's ability to manage certain challenges:

  • Market structure: Most companies active in this industry are small caps with little information and research performed on them. This is accompanied by low market liquidity, especially on the U.S. market on which most cannabis stocks remain OTC-traded. Moreover, as with most new business segments, the risk of a price bubble is not negligible. However, once the market has sorted itself and stabilises, this issue should be diminished.

  • Industry fragmentation: The industry is not uniform, displaying two distinctive businesses: medical and recreational. The first appears more acceptable and successful but comes with a variety of problems, especially political and regulatory. This sub-industry is more focused on R&D, clinical trials and distribution like traditional pharmaceutical companies. The second is more open to interpretation but should revolve around brands, marketing, and consumer segmentation similar to the tobacco or alcohol industries.

  • Increased competition: The growth of the sector is attracting a large number of companies and entrepreneurs as well as more mature companies outside the sector that are looking to expand their business in the cannabis market. The so-called "addictive industries" - alcohol, tobacco and pharmaceuticals - have invested heavily in the cannabis market, acquiring many companies to sell cannabis en masse as they do their products. This trend could radically transform the cannabis industry and hurt shareholder returns.

  • The price evolution for cannabis is unclear. The legalisation process is expected to lead to higher demand and prices in the short term. But there is also evidence that the lowering of barriers to entry has already led to oversupply in some countries and lower market prices; this could be the long-term trend, and thus squeeze companies' margins. In this case, as in many other sectors, only the strongest will be able to survive the ensuing and inevitable consolidation process.

  • An Ever-Changing Landscape: As the sector grows, it must adapt to a complex and rapidly changing legal landscape. The lack of harmonisation of the different laws that apply to the production, use and distribution of cannabis, even within the US, remains a major challenge for cannabis businesses.

  • Rising Interest Rates: Like any emerging industry, cannabis businesses need to raise capital to finance their future growth. But because of their precarious legal status, they do not have access to the banking services that many other businesses enjoy. The sector could face increasing difficulties in 2022 after the Federal Reserve signalled its intention to raise interest rates.

  • The U.S. Market: The US market remains very complicated for cannabis companies and investors. As of December 2021, only 18 of the 50 states have legalized marijuana use. Investors should watch for news about the Secure and Fair Enforcement (SAFE) banking law and the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, both of which could have a significant impact on the ability of U.S. cannabis businesses to grow and prosper.

Bottom Line

Despite major challenges, the industry can continue to develop and innovate. However, innovation is not necessarily synonymous with profitability. Many companies in the sector are not yet profitable. Although the potential for gains is there, investors only benefit if there are ultimately future profits to be shared. The big challenge for investors will be to determine which of the many start-ups, IPOs and established cannabis companies will be able to withstand disruption and succeed over the long term in a volatile and rapidly changing environment.


Disclaimer: This article is provided for information purposes only and does not constitute an invitation to invest. Please seek advice from your investment advisor before investing.


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