There’s no denying that there’s a lot of growth potential for the cannabis industry. Grand View Research expects that the global legal marijuana market will be worth $73.6 billion by 2027, up from an estimated $18 billion in 2019.
And while there are significant opportunities for cannabis producers, there’s also risk that…
comes along with that growth. Companies are learning the hard way that being too aggressive can do more harm than good as multiple cannabis producers have been laying off staff and cutting costs over the past several months in an effort to make their businesses more sustainable.
The industry is still facing many growing pains ahead, and that’s why investing in the three stocks below, which have more limited exposure to the industry, might be a much safer bet for cannabis investors today.
Shopify (NYSE:SHOP) is a tech company that offers companies a platform on which to conduct transactions and help process their sales. Many cannabis producers in Canada use Shopify, and in September, it announced it would be offering its services to U.S. companies that are selling hemp-derived cannabidiol (CBD) products.
With the passing of the farm bill in 2018, the hemp-derived products are now legal federally and give Shopify a way to tap into the industry’s growth without running afoul of federal regulators in the U.S.
For cannabis companies that may lack the technical expertise to set up and run their own e-commerce sites, Shopify’s easy-to-use platform and interface can add significant value — not to mention sales. Even government-run websites, including the Ontario Cannabis Store, have opted to use Shopify to process online marijuana sales.
The trust and credibility Shopify has established in its industry makes it an easy choice for cannabis companies. Should marijuana legalization progress federally, there’s the potential for Shopify to eventually offer its services to companies selling tetrahydrocannabinol (THC) as well.
Although it has the opportunity to benefit from the cannabis industry’s growth, with more than 1 million merchants using its platform, Shopify isn’t heavily exposed to the industry and offers cannabis investors a lot of diversification and safety.
Shopify’s sales have grown from $205 million in 2015 to $1.6 billion this past year. Unfortunately, its net losses worsened from $19 million in 2015 to $125 million in 2015. At a market cap of nearly $60 billion, it’s not a cheap buy, trading at over 34 times its sales over the past 12 months (value stocks typically trade well below 10 times their revenue). But with the explosive growth Shopify’s already achieved coupled with a fast-growing cannabis industry, many growth investors are more than willing to look past its valuation and happy to buy the stock for the significant upside it still possesses over the long term.
2. Alimentation Couche-Tard
Alimentation Couche-Tard (OTC:ANCUF) is another stock that’s dipped its toes into the cannabis industry. The global convenience store operator is known for its Circle K brand of stores, but last year, it decided to gain exposure to cannabis by investing in a 9.9% stake of Fire & Flower, a cannabis retailer in Canada with dozens of locations. The company expressed interest in the industry in 2018, when pot was first legalized in Canada, with President and CEO Brian Hannasch stating, “We’re a $60-billion company. If we’re going to divert our focus from our core, we have to believe that it leads to a path of some significant scale.”
Growth is certainly something the cannabis industry can offer Couche-Tard, and one of the things the company can offer investors in return is stability. In each of the past four fiscal years, Couche-Tard has generated strong profits totaling more than $1 billion. In addition, it’s also accumulated at least $900 million in free cash flow in each of the past six years. With strong financials, Couche-Tard is in an excellent position to help Fire & Flower grow and potentially take on more investments as well, especially with pot stocks being as cheap as they are today…
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