Marijuana companies have many battles towards profitability, causing investors to sour on cannabis stocks.
Making money in the marijuana industry isn’t easy. Due to the plant’s federally illegal status, it prohibits cannabis companies from accessing many financial services available to other entrepreneurs. Failure is not an option, as bankruptcy or short-term loans aren’t accessible in many cases. Instead, companies have relied on capital infusions from investors to grow in the market.
Legal marijuana retailers must also battle with black market producers, who can undercut prices and introduce stronger products not available under state laws. According to an analysis of the California cannabis market, illegal sellers outnumber regulated businesses 3-to-1. That’s a staggeringly fierce amount of competition, especially when those producers can undercut prices, in part, because they don’t have to pay exorbitant tax prices like those seen in California.
Don’t forget that new cannabis markets contend with legislative restrictions, too. In Florida, the legislature acted childishly after voters legalized medical marijuana in the state by banning smokable flower. The issue dragged on for over a year, with lawmakers dragging their heels all the way to court until new Governor Ron DeSantis entered office and demanded they lift the ban. At the end of last year, once the law against smokable flower was repealed, operators flooded in trying to capitalize on the suddenly lucrative market.
Meanwhile, in Canada, provincial regulations have inhibited producers from establishing a sizable retail footprint, as well as meeting consumer demands so far. Add in overhyped valuations that underdelivered and you start to understand why investors have soured on marijuana stocks. Less than 10% of cannabis companies could be considered profitable.
As Barron’s noted, cannabis stocks continue to fall. Canopy Growth, Aurora Cannabis, Tilray, Cronos, and more slipped this week. Oppenheimer analyst Rupesh Parikh believes these struggles will only continue. Stability just isn’t present in the cannabis industry, with CEOs dropping like flies at major players and significant turnover across the C-Suite executive level.
It’ll be important over the next several months for major companies to establish momentum and prepare for possible regulatory headwinds. Otherwise, we might see cannabis stocks fall further out of favor with investors.