There’s no denying that the North American cannabis industry has incredible growth potential. But it’s also no secret that the industry is encountering some serious speed bumps.
In our neighbor to the north, supply issues have plagued the marijuana markets pretty much since day one of recreational legalization (Oct. 17, 2018). Health Canada has been bogged down by applications for cultivation, processing, distribution, and sales licenses; at the same time, shortages of compliant packaging persist. Therefore, some growers are essentially biding their time on the sidelines until they’re given the OK to begin producing cannabis, while others have marijuana at the ready, but no compliant packaging to get their product into legal weed stores…
Meanwhile, in the United States (or should I say California), a combination of supply issues and taxes have hurt sales. In the Golden State, the combination of state and local sales tax, the excise tax on marijuana sales, and the wholesale tax on cannabis leaves and/or flower can lead to an aggregate tax in some locales of up to 45% on legally bought pot. That’s been more than enough to keep illicit producers in business, thereby curbing California’s legal marijuana sales.
Although many of these early problems can be worked through, some of the most popular pot stocks are expected to suffer as a result. Whereas most cannabis stocks will make the move to profitability in 2020, the following three are still expected to lose money.
Canopy Growth
Maybe the greatest irony of all is the fact that the largest marijuana stock in the world by market cap might be the last of the major pure-play pot stocks to make money. According to Wall Street’s consensus estimate, despite $775 million Canadian dollars ($584 million) in fiscal 2020 sales, Canopy Growth (NYSE:CGC) is liable to lose CA$0.48 per share.
The reason for Canopy’s steep projected loss in 2020 ties into its desire to create infrastructure domestically and globally, to take advantage of legalization in key markets. For example, it anticipates spending quite a bit in perhaps a half-dozen U.S. states to construct or acquire hemp-processing infrastructure. This includes spending up to $150 million (those are U.S. dollars) in New York State after being awarded a hemp-processing license in mid-January. Having this infrastructure on U.S. soil will be as good as gold if and when the government changes its tune on marijuana at the federal level.
Canopy Growth has also been aggressive on the acquisition front — it acquired Colorado-based cannabis and hemp intellectual-property company ebbu for $310 million in November — and has not been shy about spending on marketing, brand building, and product diversification. Despite having what’s arguably the most recognizable pot brand throughout all of Canada in Tweed, Canopy is going to have to spend liberally to maintain what competitive advantages currently exist…
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