Which U.S. marijuana grower has the biggest market cap?
While there are Canadian medical marijuana suppliers that are larger, Medical Marijuana, Inc. (MJNA -1.30%) appears to be the largest U.S. marijuana stock right now (excluding biotechs that are developing cannabinoid drugs). But Medical Marijuana, Inc. has a market cap of less than $300 million in an industry for which annual revenue is projected to grow to around $50 billion within the next decade.
The fact is that the marijuana industry seems primed for larger companies to step in. Probably the best candidates to do are the giant tobacco companies, such as Altria Group (MO 1.21%), Philip Morris (PM 0.40%), and Reynolds American (RAI). Could a major upheaval for current marijuana stocks be on the way with Big Tobacco entering the market?
No April Fool's joke
Rumors floated around back in the late 1960s and early 1970s that the major tobacco companies were considering looking into the marijuana market and that some were even registering brand names for potential marijuana products. Those rumors led to a blanket denial from several large tobacco companies as well as The Tobacco Institute, whose spokesman said, "Rumors about the cigarette industry's involvement with marijuana are as persistent as they are false."
Those rumors were certainly false at the time. But the spokesman for The Tobacco Institute probably had no idea just how persistent they would be. On April 1, 2016, the website Abril Uno ran an article headlined "Philip Morris Introduces Marlboro 'M' Marijuana Cigarettes." The article quoted an executive from Philip Morris as stating "that the company has been high on the idea of marketing cannabis, and has been monitoring the market for some time."
While many believed that Philip Morris was indeed entering the marijuana market, it was all just an April Fool's joke. The name of the website that initially ran the article translates to "April One" -- April Fool's Day.
But what was once an April Fool's joke might not be a laughing matter anymore. A quick glance at marijuana stock charts shows that the legal marijuana industry has become a serious business. For example, despite a major pullback this year, Medical Marijuana's share price has still more than doubled over the last 12 months.
The numbers adds up
It actually makes a lot of sense that tobacco companies would be very interested in the marijuana industry. Some big tobacco companies have already staked out positions in the vaping market, which has crossover potential between tobacco and marijuana. In 2014, Altria acquired the e-vapor business of Green Smoke for $110 million. Reynolds launched its e-cigarette, branded as Vuse, in 2013. Philip Morris even received positive news that its iQOS heated-tobacco product is being reviewed by the U.S. Food and Drug Administration as a "modified-risk tobacco product."
That's still not the same thing as entering the marijuana market, of course. However, the numbers appear to add up for the next big step. The numbers of tobacco cigarettes sold in the U.S. have been generally declining since 1981 and is expected to continue to decline. Altria, which has the largest market share for cigarettes in the U.S., reported a 2.5% decrease in U.S. cigarette shipment volume last year.
Overall revenue from cigarette sales has grown -- but not by much. One option for tobacco companies to grow is to merge or acquire other companies. Reynolds, for example, acquired Lorillard in 2015 and is in the process of being acquired itself by British American Tobacco.
The other option, though, is to expand into new markets. Altria owns a winery and a stake in giant beer company Anheuser Busch Inbev NV. But the explosive growth in the marijuana market is one that the tobacco companies surely can't ignore.
Expanding into the marijuana market seems to be a perfect fit for companies like Altria, Philip Morris, and Reynolds. These companies already have the agricultural and manufacturing expertise that should translate well to marijuana. They have the marketing organizations to target the significant opportunities in states like California and Colorado, which have legalized recreational marijuana as well as medical marijuana.
Perhaps just as important, the big tobacco companies have a long track record of navigating the political landscape in Washington, D.C., In 2016, the tobacco industry had 185 lobbyists and collectively spent nearly $20 million in campaign contributions. Political connections could be huge in helping pave the way for further legalization of marijuana in the U.S.
Impact on marijuana stocks
What might happen to marijuana stocks if the big tobacco companies enter the market? There are three potential scenarios.
One is that some of the current marijuana companies could be acquired by tobacco companies. Another is that some marijuana companies could find a way to survive and thrive by targeting specific niche markets -- like quite a few local bookstores have done in the face of competition from Amazon.com. Then there's the other alternative: Many marijuana stocks could be wiped out as they face intense competition from huge companies with tremendous financial advantages.
My prediction is that the big tobacco companies will jump into the marijuana market. I suspect that all three of the above scenarios will play out. How long it will be before this happens -- and what the fates of specific marijuana stocks might be -- remains to be seen. If this occurs, the marijuana industry as we know it today is in for a major upheaval.