The cannabis industry is maturing and ready for more growth

Equities 8 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  The cannabis industry has been growing at a rapid pace the past five years as more and more US states have legalized recreational use of cannabis and in some US states narrow medical use is also legalized. However, Canada is also a big and growing market with a better legal framework and Europe is still long behind North America offering a potential third major market in the future. Key to future growth will be legalization on the US federal level and more scientific proof of health benefits from cannabis oil and related drugs. But despite of all the various obstacles the industry has grown revenue by 37% over the past year highlighting the great potential.


Today we are launching our 18th equity theme basket, and this will be the final one before the holiday season kicks in. Later this year we will roll out new theme baskets that will focus on green metals (used in the green transformation), payments, robotics and automation, medical technology as much more.

Next growth period to be driven by medical use and federal legalization

As the table below shows, the cannabis theme basket is the second-best performing theme basket this year after our crypto and blockchain basket up 45%. The drivers behind the performance are continued legalization in more US states, a Democratic majority owned US Congress which increased the probability of federal legalization of cannabis, and finally continuous high revenue growth numbers from several key industry players. One of the recent legislations moves have come from US House Judiciary Chair Jerry Nadler reintroducing the social justice focused cannabis legalization bill, also known as the MORE Act.

According to some estimates the US market for cannabis will reach $18.4bn in 2021 and then grow to $24bn in 2025 with medical use overtaking recreational use as the key growth driver. But key to the medical use as a driver is scientific proof that can convince the FDA of the effectiveness of THC and CBD (read a description of THC and CBD here). Other key growth drivers over time are easier access to financing which is expected as regulation eases and potentially a full-blown legalization on the US federal level. Economics of scale is important in this industry and therefore mergers and acquisitions will be an important driver of shareholder returns in the coming years. Europe is a small market relative to Canada and the US, so there is a considerable upside potential for the industry in Europe. This recent Deloitte industry report is a good read on the different drivers.

Some of the companies in our basket are on reduce-only in our trading systems meaning that they cannot be bought but only sold. IM Cannabis is not available on the platform because we do not have a price feed for the Canada Securities Exchange which is an alternative exchange to Toronto. Why are some of the major companies in the industry listed on a small alternative exchange? The TMX Group, behind the Toronto Stock Exchange, has imposed regulation preventing companies with US cannabis business or assets to list on the main exchange in Canada because cannabis is still illegal in the US on a federal level. As a result, many US business in the cannabis industry has listed on Canada Securities Exchange. But Curaleaf’s Executive Chair Boris Jordan has said recently that they expect US cannabis companies to be able to uplist to major US exchanges if the US Congress passes a cannabis banking reform legislation. If the industry gets these legislations through US Congress it will open for institutional ownership and easier financing, which could create a boom in cannabis stocks.

The table shows the companies that have been included in the cannabis basket. We could only find 20 companies with good direct exposure to this theme and a sufficient market value. The 20 companies are combined valued at $51bn which is a very small investment theme, but that means that the potential is also likely that much greater. The median revenue growth the past 12 months has been 37% and EBITDA is also improving in the industry. Sell-side analysts covering the companies have an average price target that is 26% above the current market price.

NameMkt Cap (USD mn.)Sales growth (%)EBITDA growth (%)Diff to PT (%)5yr return
Curaleaf Holdings Inc (*)9,642180.0492.861.71,639.0
Canopy Growth Corp8,65337.127.322.6881.0
Tilray Inc7,2905.342.26.4NA
Green Thumb Industries Inc (*)7,190122.7393.242.9102.1
Innovative Industrial Properties Inc4,785135.17,066.89.4NA
Cronos Group Inc2,95674.4-12.2-6.65,332.4
WM Technology Inc2,364NANANANA
Sundial Growers Inc1,907-19.7NA-33.9NA
Aurora Cannabis Inc1,572-12.1-55.3-12.9112.3
Turning Point Brands Inc87716.9175.138.7370.7
Organigram Holdings Inc769-19.0-512.320.2220.4
HEXO Corp73662.471.825.6252.8
Charlottes Web Holdings Inc6040.7-105.046.8NA
Valens Co Inc/The423-18.3NA55.4NA
High Tide Inc362NANA93.8NA
AFC Gamma Inc350NANA25.1NA
IM Cannabis Corp (*)282NA-6,129.581.9NA
RIV Capital Inc282NANA26.3NA
Agrify Corp263195.7-296.362.2NA
Clever Leaves Holdings Inc24254.723.9NANA
Aggregate / median51,54837.125.625.9311.7

Source: Bloomberg and Saxo Group
* These stocks are either on reduce only or not available on the trading systems due to lacking price feed

As the chart below shows, the long-term performance of the cannabis basket has been good, but as with all our baskets the performance has strong survivorship bias because we create the basket today and calculate performance backwards in time. We do this, because regulation requires us to show 5-year historical performance on securities or indices of financial instruments. The historical performance is not an indicator of future performance. What is notably is the strong performance since the lows during the pandemic likely highlighting the growth of retail investors which are the dominant source of demand for cannabis stocks.

Key risks

The biggest risks when investing in cannabis stocks are the low liquidity and high volatility in many of the stocks driven by the low ownership ratio by institutional investors. The long-term growth outlook is dependent on a US federal legalization of cannabis for both recreational and medical use, but also legal adoption in international markets such as Europe. The industry is competitive and many of the companies have not yet reached profitability which increases the bankruptcy risks overall in the industry. News stories related to overdoses of misuse for either recreational and medical use could drive negative public relations stories and scrutiny by politicians. The medical use as a key driver hinges on sound scientific proofs of health benefits from cannabis oil and related drugs, which is still uncertain at this point.

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