In case you've missed it, the marijuana industry is budding before our eyes. In North America, according to cannabis research firm ArcView, the legal weed industry is expected to reach nearly $25 billion in annual sales by 2021. That works out to a compound annual growth rate of 28% between now and then, placing it among the fastest-growing industries on the planet.
The public's perception toward pot also continues to shift. What had once been a taboo drug that no politician would dare discuss is now a topic covered in most U.S. elections, and even discussed within American households. Numerous polls over the past year have found overwhelming support for the legalization of recreational and medicinal marijuana.
Of course, no country has led the charge for pot progressivism more than Canada. With the United States proving unwavering on its Schedule I classification of cannabis, Canada has stepped forward to become the industry's outlet. With legislation currently being reviewed in parliament, Canada appears set to become the first developed country in the world, and second overall behind Uruguay, to have legalized recreational marijuana by this summer. With a tax-deal in place with all but one province (Manitoba), legalization simply seems like a formality at this point.
Canopy Growth vies for market share
With the expectation of a surge in demand and sales -- adult-use weed could lead to $5 billion or more in added annual sales in Canada -- Canada's largest growers have been busy ramping up their production capacity. Perhaps none brings more to the table than Canopy Growth Corp. (NASDAQOTH:TWMJF), the largest marijuana company in the world, by market cap.
According to Canopy's recently released third-quarter operating results, it has seven licensed facilities across 665,000 square feet of growing capacity, and it's constructing or developing greenhouses on another 3.7 million square feet in British Columbia. Though the company has been tight-lipped about its production potential or greenhouse completion dates, if we were to conservatively estimate 100,000 kilograms of production per 1 million square feet, Canopy Growth could potentially deliver up to 400,000 kilograms annually within a few years. By the turn of the decade, at least 300,000 kilograms in annual production looks like a near-certainty, making it the clear leader in market share.
As an avid acquirer and a master of building its cannabis brands -- Tweed is the best-known weed brand throughout Canada -- investors have simply been waiting to see what Canopy and its management team would do next. This past week, they got their answer: Canopy Growth is heading to the Nasdaq (NASDAQ:NDAQ).
Canopy Growth is (eventually) heading to the Nasdaq
According to a Reuters report, Canopy Growth Corp. plans to list on the Nasdaq exchange in the U.S. "in due course," per CEO Bruce Linton. Canopy had been preparing to be the first Canadian grower to list on the Nasdaq in October, but its plans were halted when spirits giant Constellation Brands acquired a 9.9% stake in the company for roughly $190 million, according to a speech Linton gave at the Economic Club of Canada. Said Linton:
When Constellation put money into our business, the number of U.S. institutional investors interested in us went way up. The Nasdaq is doing a great job not allowing people to list who break federal laws and that's a place where we should list in due course.
When might this move happen? That's unclear at this time, but Beacon Securities research analyst Vahan Ajamian suspects it might occur during the second quarter. A Nasdaq listing would open the floodgates for institutional investors to buy into the company. Remember, quite a few institutional investors won't buy stocks that trade on the over-the-counter (OTC) exchanges, which is where Canopy Growth is currently listed.
However, when it does make the move, Canopy won't be the first to have done so. In the waning days of February, Cronos Group (NASDAQ:CRON) beat it to the punch. Interestingly enough, shares of Cronos Group soared as much as 36% in the week following its uplisting from the OTC exchange to the Nasdaq exchange. This increase was likely a result of institutional interest in Cronos as well as improved liquidity and visibility. But with Canopy being the largest pot stock by market cap, its interest from institutions and investors could dwarf what happened to Cronos.
A bigger-picture concern
While a Nasdaq listing could bring a short-term lift to Canopy's share price, it's not exactly a long-term driver of value. Investors who are in the cannabis trade for the long haul should be far more concerned about what the supply and demand breakdown will look like come 2019 or 2020.
As noted, Canopy Growth looks to be the largest cannabis producer, with the top five producers generating anywhere from 900,000 kilograms to 1,000,000 kilograms in annual yield. The problem is that Canada's annual demand may only tally around 800,000 kilograms, based on various reports and estimates. Foreign markets where exporting is allowed could help absorb domestic excess, but it's unclear at this point if demand will be off the charts, of if a marijuana glut will hit the marketplace and drive per-gram prices significantly lower.
If there is a plus side here, it's that Canopy is well funded, and its greenhouses are expected to see growing costs fall over time. Thus, even with a substantial drop in per-gram cannabis prices, Canopy should be fine. Not to mention, it's also focusing more on extracts and cannabis oils than ever before, which are higher-priced and higher-margin items. Still, the supply and demand situation bears close monitoring.