When discussing the fastest-growing industries on the planet, few, or none, may top the legal marijuana industry. According to cannabis research group ArcView, North American legal pot sales are expected to soar from $6.9 billion in 2016 to nearly $22 billion by 2021. This growth is being fueled by state-level and countrywide expansions, as well as the ability to bring what was more than $46 billion in black-market marijuana sales in North America last year over to legal channels in the years to come.
It's because of this growth that marijuana stocks have been on fire. A vast majority of the largest weed stocks have seen their share prices double or triple over the past year in anticipation of growing demand, higher sales, and juicy profit potential.
Pot stocks have also benefited from a clear shift in the public's views toward marijuana. An all-time record percentage of people in Gallup's (60%) and CBS News' (61%) latest polls want to see weed legalized across the country.
The pot industry has a steep learning curve
But for all the positives, there are a plethora of negatives that the marijuana industry is contending with. Front and center would be the fact that recreational marijuana is wholly illegal throughout North America. In fact, only one country in the world, Uruguay, has fully legalized cannabis for retail sale to adults. This suggests that many of the disadvantages that U.S.-based marijuana businesses are dealing with now, such as an inability to obtain basic banking services and the inability to take normal corporate income-tax deductions, are likely to continue.
Losses among marijuana stocks are also commonplace, as a result. With the exception of a handful of Canadian producers and retailers for the medical cannabis industry that have benefited from substantial patient growth, most pot stocks are consistently losing money, despite their frothy valuations. Even state-level expansions in the U.S. are showing investors how much of a learning curve is still to come with the legal weed industry. We only need to look at Nevada's recreational pot rollout for evidence of this.
Nevada's recreational weed industry went from launch to emergency in just 10 days
In November, Nevadans voted pretty decisively to legalize recreational marijuana throughout the state. However, the challenge for regulators has been in setting up a distribution system for legal cannabis, given the language of the law.
Under Nevada's pot law, liquor wholesalers, who fear losing business to the legal marijuana industry, were anointed as the sole distributors of marijuana for the first 18 months. Essentially, that makes liquor wholesalers the indispensable middleman in Nevada's pot industry.
The problem is, few liquor wholesalers (just seven out of nearly 70) have shown interest in becoming distributors that transport the product from grow facilities to dispensaries. This is because liquor wholesalers get their liquor licenses distributed by the federal government and, under a strict interpretation of the law, they fear losing these licenses by acting as a cannabis intermediary. This puts Nevada's marijuana industry in an odd bind. They have roughly 100 licensed growers with product and dispensaries in need, but no way to connect the two.
How did the practical application of Nevada's recreational marijuana launch work on July 1, you ask? It was both encouraging and dumpster fire all rolled up into one. Sales of recreational marijuana in Nevada were exceptionally strong, with sales of $3 million in just its first four days. This puts the state on track for about $30 million in sales in its first six months.
But at the same time, it took the state just 10 days for Gov. Brian Sandoval (R-NV) to declare a state of emergency because of a shortage in marijuana supply in dispensaries. I'm going to go ahead and repeat that for those of you skimming... a state of emergency was declared by Nevada's governor because dispensaries were running low on weed.
Though this hardly seems like a reasonable excuse to declare a state of emergency, the declaration allowed state officials to work on new rules to ease the marijuana shortage. Just three days after the emergency declaration, Nevada's Tax Commission approved new regulations that should allow for distribution of product across the state. Whether this provides a permanent fix for Nevada's recreational weed supply chain remains to be seen.
What Nevada can teach marijuana stock investors
The problems Nevada is experiencing with its weed supply chain highlights an important point for marijuana stock investors -- namely, that the legal pot industry is nascent and the learning curve remains steep. There are numerous unknowns about the future of marijuana throughout North America, and even legalizations don't guarantee success if the regulations within those laws aren't conducive to industry growth.
Nevada's launch hiccups also suggest that expectations surrounding marijuana stocks may be too optimistic. Don't get me wrong: There's pretty clear evidence that consumer interest in purchasing recreational pot is high in already legal states. However, marijuana stock valuations are in the stratosphere and suggest that future cannabis growth will occur without a hitch. As we saw with Nevada rushing to declare an emergency just 10 days post-launch, that many not be the case.
Whether we're talking about retail dispensaries or cannabinoid-based pharmaceuticals, sales-growth expectations could be a bit overzealous. Even GW Pharmaceuticals (GWPH), which is the flagship marijuana stock because of its nearly $3 billion market cap, could struggle with red tape from the Food and Drug Administration when attempting to bring Epidiolex to market as a possible treatment for two rare types of childhood-onset epilepsy. GW Pharmaceuticals could be worth $3 billion if Epidiolex hits on all cylinders post-launch, but that's far from a given.
Let Nevada's cannabis catastrophe serve as a warning that marijuana stocks carry risks, and your safest place might be on the sidelines until the industry matures.