Canadian pot companies are worth billions — but is it a bubble ready to burst?

Investors have rushed to pour money into the growing number of Canadian-listed shares in marijuana-related companies. But experts caution that the torrid pace is unlikely to last forever.

“Everyone compares this to the dot-com era,” said Chris Damas, editor of investment newsletter The BCMI Cannabis Report. “You could throw a dart and hit a winner in cannabis.”

The legal cannabis market is worth about $10 billion already in North America, and projected to grow in the coming year. A report from Arcview Market Research estimates that figure is set to expand to almost $25 billion in three years — and that’s assuming no other U.S. states move to legalize between now and then.

Ever since the federal government announced last year that it intended to legalize the recreational use of cannabis for adults starting July 2018, Canada has become a global hotbed of the burgeoning industry, because the regulatory regime elsewhere has handcuffed would-be rivals.

“Canadian licensed producers have a chance to grab first-mover advantage in a worldwide market that U.S. agricultural and pharmaceutical companies could otherwise have been expected to dominate,” wrote Tom Adams, Arcview’s managing director, in the report. “The U.S. northern neighbour may be the world leader in moving toward a well-regulated legal cannabis industry.”

Bloomberg data shows there are 84 public companies trading on Canadian stock exchanges that are somehow connected to the cannabis industry, and collectively they are worth $37 billion US.

Chief among them is Ontario-based Canopy Growth Corp. More than a year ago, Canopy made headlines as Canada’s first billion-dollar pot company. Today, it’s worth more than six times that.

“We’re in full expansion mode,” Canopy Senior Vice-President and Managing Director Rade Kovacevic told CBC News in an interview this week. Canopy has added three million square feet of greenhouse capacity this year, and expanded into a number of other provinces.

“We are gearing up for it and excited about it,” he said. “It’s kind of a massive startup company.”

But they aren’t the only ones. While full of small operators, the industry is dominated by four big names: Canopy Growth, Aurora Cannabis, Aphria and MedReleaf. Canopy was at one point well out ahead in front, but Aurora has grown quickly through acquisitions, most recently a high-profile one that saw it take over Saskatoon-based CanniMed for almost $50 a share.

Investors have ridden the wave of pot companies, pushing valuations sky-high in the process. Canopy posted less than $40 million in revenue last year, but the company is worth more than Air Canada, who booked more than 350 times that amount of revenue over the same period.

“Value on the stock market and sustainable business franchises are different,” Damas said, adding that the current flurry of consolidation activity is being driven by artificially high stock prices, which itself is being driven by almost insatiable investor demand for anything pot-related. 

“If you give me enough Monopoly money,” Damas said, “I can buy Park Place and Boardwalk, too.”

While Damas suspects the current bull run is likely to last at least through the soft legalization deadline of July 1, he does acknowledge that the big four pot companies are all legitimate businesses, with real growth plans that have them poised to outperform other rivals.

“Commodity bud is going to go to $1 or $2 a gram,” he said, “so shelf space and distribution will be key.”

“The top four will do the best and the smaller players are just riding the wave of investor enthusiasm.”

There is indeed real money to be made. When a number of U.S. states legalized the drug in 2016, the windfall was almost immediate. According to Arcview, the 420 licensed dispensaries in Colorado took in $834 million US in revenue last year. That’s almost $2 million per location.

Better still, the state’s illegal market shrank by half to about $500 million — a figure that’s eclipsed by the amount that states where it’s legal earned in pot taxes last year, Arcview calculates.

With the prospect of an incoming bonanza, it’s perhaps small wonder why investors are piling in. But analysts are cautioning expectations even as they hike their target prices for companies in the space.

As PI Financial analysts Jason Zandberg and Devin Schilling put it in a recent research note on Canopy, “We caution investors that all cannabis stocks have risen quickly and the downside risk has also increased.”

Damas put it a little more bluntly: “When you see stocks going up 10 per cent in a day, it’s like shooting fish in a barrel,” he said.

“But the main thing is to know when to get out.”

SOURCE: CBC.ca

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