Please ensure Javascript is enabled for purposes of website accessibility

This Major Health Concern Could Wreak Havoc on the Cannabis Industry’s Growth Potential

By David Jagielski - Aug 26, 2019 at 5:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How well Curaleaf and other pot stocks are able to grow in the U.S. will depend on the perceived risks related to using cannabis, and right now, there are still many questions.

Cannabis has sky-high potential, with some estimates projecting the industry in the U.S. growing bigger than the soda industry, potentially reaching as much as $75 billion in revenue by the end of 2030. A big part of that success will depend on how much consumers, patients, lawmakers, and doctors buy into CBD's purported benefits. The concern right now is that it's hard to tell fact from fiction.

A big part of the problem is that cannabidiol (CBD) may be overhyped. Curaleaf Holdings (CURLF 1.37%) has already gotten into trouble for making potentially misleading claims that CBD can treat cancer, Alzheimer's and other illnesses, according to the U.S. Food and Drug Administration. But aggressive advertising may not be the greatest risk facing the fledgling industry. Instead, health dangers related to vaping may create the biggest obstacles for cannabis companies today. Vaping is a popular way for people to consume both nicotine and cannabis, and it usually involves either an e-cigarette or a vaping device known as a vape pen. KushCo Holdings (KSHB) is one of the major producers of vaping products, and the company has sold more than 1 billion units since 2010.

Vaping has given the tobacco industry new life as it has often been touted as a safer alternative to smoking cigarettes. Some of the big names in the industry have gotten involved as well. Altria Group (MO 2.09%) bought a 35% stake in e-cigarette giant Juul Labs last year and it also owns 45% of cannabis producer Cronos Group (CRON 5.42%), with the possibility of upping that percentage to 55%. There's plenty of crossover when it comes to vaping, tobacco, and cannabis. Meanwhile, Philip Morris (PM 1.80%) developed its own vaping product, IQOS, with the company claiming approximately 8 million people purchased the device so far.

Vaping concerns are on the rise

Earlier this year, a vaping device blew up in someone's mouth, causing severe damage. While the industry may want people to believe this was an isolated incident, there are still other problems related to vaping that appear more widespread. In just two months, there have been as many as 153 cases of respiratory illnesses related to vaping across 16 states. Many of those impacted are minors, as vaping continues to rise in popularity among teens. 

While a cause of the respiratory illnesses being observed has not yet been identified, the concerning part is that these problems are not limited to one type of product or device. It's also unclear how many of the illnesses are due to vaping tetrahydrocannabinol (THC) or nicotine, as users often use the devices for both chemicals. The Centers for Disease Control and Prevention believes vaping either substance could be dangerous. 

The first death in the country that appears to be related to vaping happened recently in Illinois. The person, having recently vaped, suffered from a "severe respiratory illness." Although more information is still needed, with rising cases of vaping-related issues, there is definitely some added urgency in identifying the root causes of these problems. However, figuring that out is not going to happen overnight.



Young people are vaping more than ever

Vaping products have become mainstream and they're even able to be advertised through television since technically the products don't fall under the ban related to cigarette advertising. However, that doesn't mean the FDA is going to let retailers sell to kids. The FDA sent more than 1,000 warning letters to retailers that sold Juul and other vaping products to minors last year, putting companies on notice that the agency isn't taking the issue lightly.

Protecting children has been one thing that's been consistent in the legalization of marijuana, as there is a strong desire to keep kids away from cannabis, and that's not likely to change. Unfortunately, vaping is growing ever more popular among children, with rates of use rising significantly over the past two years. Given the rapid growth among minor users, the issue is more critical than ever.

Below is a breakdown by grade level of the percentage of kids who said they vaped in the past year:

Age Group 2016 2017 2018
8th Graders 0% 13.3% 17.6%
10th Graders 0% 23.9% 32.3%
12th Graders 0% 27.8% 37.3%

Source: National Institute on Drug Abuse

Why this matters for investors

The reason this is important for cannabis investors and cannabis companies operating in the U.S. is that vaping has been a big part of the industry's growth thus far. According to cannabis research company BDS Analytics, these are the top 10 product categories for the industry, from January to May of this year:

Category Sales
Flower $768 million
Vape cartridges $473 million
Pre-rolled joints $157 million
Gummies $147 million
Live resin $85 million
Dropper $62 million
Disposable vapes $62 million
Wax $40 million
Shatter $38 million
Chocolate bars $33 million

Source: BDS Analytics

Vape cartridges account for about 25% of sales and if disposable vape sales are included, the combined percentage climbs to 29%. As vaping continues to grow in popularity, the size of that segment is likely to get bigger. 

Curaleaf, in particular, is banking on a lot more growth for the industry as it has been making some key acquisitions along the way to help the company grow and expand throughout the U.S. It reported strong numbers in its recent earnings release and could be a promising stock for cannabis investors, but the success and growth of vaping is going to play a big part in that.

If regulators decide to come down hard on vaping by implementing more restrictions, it could have an adverse effect on the broader cannabis industry. It also doesn't help that investors have already been bearish on cannabis stocks lately due to non-compliance issues and a general lack of profitability from marijuana companies. Case in point: Curaleaf's stock has fallen more than 30% in just the past three months.

Investors would be smart to keep their attention turned to the dangers of vaping.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kush Bottles, Inc. Stock Quote
Kush Bottles, Inc.
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
$5.18 (1.37%) $0.07
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$43.40 (2.09%) $0.89
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$103.40 (1.80%) $1.83
Cronos Group Stock Quote
Cronos Group
$3.11 (5.42%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.