The Cannabis Industry: What Are the Opportunities and Risks for Investors?

by NEIRG Research and Analysis Team | Jun 11, 2019

The legalized cannabis industry has been on fire over the past several years, mimicking the lucrative growth of the tobacco and alcohol industries in the 20th century. Once considered a risky and illicit market, cannabis has become increasingly mainstream as states continue to legalize the drug for medicinal, and more recently, recreational use.

While cannabis remains federally illegal, over 31 states have legalized the drug in some form, following in the footsteps of early adopters such as California and Oregon. This legalization has spurred an emerging, $10.4 billion industry, with large and small players vying to make a name for themselves in the crowded ecosystem of growers, distributors and retailers. Despite concerns over regulation and the legitimacy of the industry, this widespread growth, both geographically and demographically, indicates that the cannabis sector is here to stay.

Not only has the burgeoning industry caught the attention of consumers, but cannabis has also started to take root in finance. There are currently three exchange-traded funds (ETFs) trading in the U.S. markets, with total assets under management of $1.27B. While the opportunity to invest in an emerging, profitable industry certainly sounds appealing, there are some risks that investors should consider before moving forward. Our investment team has taken the time to evaluate the following pros and cons and we encourage investors to educate themselves before investing.

Opportunities in the Dynamic Industry

Budding cannabis entrepreneurs have ventured into a rapidly growing industry, with global sales anticipated to reach $75 billion by 2030. While many entrepreneurs are concerned the industry will become too competitive, one of cannabis’ most valuable drivers of industry growth is its diversity. There are many different strains, concentrations and forms of consumption, offering considerable room for companies to differentiate themselves as they seek to dominate niche corners of the industry.

Potential for Widespread Acceptance

Sixty-two percent of Americans support the legalization of marijuana, which represents a steady increase over the past decade, according to research conducted by the Pew Research Center. Cannabis has garnered mainstream acceptance among the American public, drawing a large base of consumers using the product for various medicinal and recreational reasons. National acceptance is likely to continue growing, as new medical applications are discovered, and more innocuous forms of consumption are introduced to the market. In addition, the drug’s growing popularity may very well create a domino effect that leads to rapid legalization among states or spur federal legalization of the substance.

Cross-Industry Partnerships

Companies from adjacent, highly regulated industries have been willing to make significant investments in leading cannabis firms. Altria, the manufacturer of Marlboro cigarettes, invested over $1.8 billion in grower Cronos Group last year, while Constellation Brands, the maker of Corona, invested $4 billion in Canadian company Canopy Growth. Not only do these valuable partnerships provide capital to fund growth, but also create a platform for sharing insights into operating under the strict regulatory environments facing the alcohol, tobacco, and now, cannabis industries.

Growing Pains

Despite this initial excitement, it is important to remember the difficulty of scaling to a multibillion-dollar industry overnight. The legal cannabis industry is still in its infancy and likely to experience significant growing pains. Many questions remain about the market’s ultimate size, regulations and competitive landscape. Leading producers can be expected to experience difficulties scaling operations to meet increased demand, maintaining quality as they grow, and differentiating and branding their products in this emerging, competitive space.

Regulatory Complexity and Barriers to Entry

Regulation is perhaps the most obvious and significant challenge facing the cannabis industry. While many states have legalized, or are in the process of legalizing, cannabis in some form, the substance remains illegal federally and is classified primarily as a Schedule I drug by the Drug Enforcement Agency. As the national debate over the decriminalization of cannabis continues, growers, producers and retailers will continue to face uncertainty. While many do expect the market to follow in the footsteps of alcohol and tobacco, regulatory complexity could still create barriers to entry for entrepreneurs, as well as investors.

Over the past five years, the investment community has witnessed the birth of several exciting and lucrative industries. From cannabis and e-cigarettes to artificial intelligence and autonomous vehicles, these sectors offer promising opportunities for growth-minded investors. However, as with any smart investment, it is crucial to proceed with caution, consult with trusted advisors and do your homework before jumping in with both feet.