Aurora CEO makes grim prediction for U.S. pot market

0

With over two-thirds of Americans supporting the legalization of marijuana, it seems it’s only a matter of time before pot is legalized in the United States. When this happens and cannabis can freely cross state borders, significant growth opportunities for the industry and businesses operating within will emerge.

But that doesn’t mean that legalization will go smoothly for everyone, or that it will simply translate into more income for the country’s already large cannabis producers. There will certainly be growth, without a doubt, but Aurora Cannabis (NASDAQ: ACB) CEO Miguel Martin recently warned investors that legalization could pose significant challenges.

Image source: Getty Images.

The pot market could look a lot like Canada’s

Canopy growth (NASDAQ: CGC) CEO David Klein expects his company to operate in the United States within the next 12 months. This suggests that significant marijuana reform should take place (likely full legalization) before then. However, Aurora’s CEO doesn’t seem so optimistic, believing that legalization could take longer than people believe – although he hasn’t made a precise prediction as to when that could happen. .

And when the United States decides to legalize marijuana, Martin said in a recent interview that he thinks regulators will look to the Canadian model and use a similar approach, stating that “I just think people are kinda naive if they don’t. thinks it will be a lot like Canada and a lot less like the Old West when it comes to federal cannabis regulation. “

While borrowing ideas from the Canadian market would help US regulators navigate legalization and perhaps speed up the process, it could pose challenges for the industry. In the Canadian cannabis industry, one of the main problems is that there are many warning labels on the products and minimal space for a company to even display its name or logo. It makes branding nearly impossible, and it doesn’t help that advertising is virtually non-existent, either.

Another onerous restriction imposed on cannabis producers in Ontario, in particular, is that they cannot be licensed to retail. The maximum ownership they can have in a business that has a retail license is 25% – and that’s after the provincial government increased the percentage to 9.9%. This saves licensed producers from having too much power and prioritizing their own products in stores.

And for products that hit store shelves, companies also need to be careful about how they’re named. Cannabis-infused drinks, for example, cannot use “beer” or “wine” in their names, and the products cannot even be paired with an alcoholic beverage. This eliminates any benefit that Canopy Growth may have received by partnering with Constellation brands and potentially capitalize on the popularity of its popular brands Corona and Modelo. Not only are cannabis products in Canada lackluster, but big producers like Canopy Growth cannot take advantage of some of the popular brands they are aligned with, making it difficult to differentiate from competing products.

Why a legal market could be bad news for large multi-state operators

The biggest problem that a highly regulated market could pose for multi-state operators is that it could make growth more difficult. Last year, the Brightfield Group released the results of a survey of 3,000 Canadians and found that over 40% of respondents were aware of Tweed (a brand owned by Canopy Growth) and about a third were familiar with Aurora. However, outside of these big names, there wasn’t a lot of familiarity. For 17 brands, the level of awareness is less than 20%. This includes a relatively big name in the industry like Tilray. Only 9% of consumers knew their brand.

This is good news for small cannabis companies looking to capture market share, as it means that a firmly established brand is not guaranteed to dominate the industry. But for large multi-state operators like Curaleaf (OTC: CURLF) Where Trulieve Cannabis (OTC: TCNNF), legalization in this scenario could inhibit their growth. Large Canadian cannabis companies are struggling to generate strong revenue growth, even though it was just over two years since the country legalized marijuana in October 2018. In its most recent fiscal year, the Aurora’s net sales of C $ 278.9 million for the period ending June 30, 2020, were only 13.6% higher than they were the previous year. This pales in comparison to US multi-state operator Curaleaf, which generated $ 396.4 million in revenue in a shorter nine-month period ending September 30, 2020, an increase of 172.3 million. % year over year. The company operates more than 90 dispensaries in 23 states and has 22 grow sites and 30 processing sites. It sells consumers a variety of products, ranging from vapes and flowers to mints and edibles.

However, that doesn’t mean that Curaleaf’s growth will suddenly drop below 20% after legalization. After all, the American pot market is much larger than that of Canada; Cannabis research firm BDSA predicted last year that it could be worth $ 34.5 billion by 2025, while the Canadian market will only be worth $ 6.5 billion by then. But there is no doubt that a strict approach to regulation could have a negative impact on consumer recognition, even for the biggest brands.

What does this mean for investors?

Investors have no reason to be concerned at this time. There are still many question marks surrounding legalization and what it might look like when it happens. But for an industry that can sometimes be overly optimistic about the future, it wouldn’t be a bad thing for investors to lower their expectations a bit, as legalization often means more rules and red tape. This is why Martin’s conservative outlook for the industry appears to be much more realistic than Klein’s.

Investors should be careful when considering the price they are paying for a pot stock today and avoid justifying a high premium by simply rationalizing that there will be more growth down the road. While the industry is still in its early stages of growth, that doesn’t mean big brands will dominate, especially in an environment of tighter regulation. And for many stocks, this future growth is already built into their current stock price.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Leave A Reply

Your email address will not be published.