Chances are high -- pardon the pun -- that marijuana will be one of the greatest growth stories of our generation. With worldwide legal weed sales more than tripling between 2014 and 2018 to $10.9 billion, the research team of Arcview Market Research and BDS Analytics foresees sales climbing to more than $40 billion by 2024. Looking out even further, some of the most aggressive Wall Street estimates portend that global sales could hit $200 billion annually in about a decade's time.
While the United States should be the top-selling marijuana market in the world, it's Canada that tends to garner a lot of attention from investors. That's because last year Canada became the first industrialized country in the world -- and only the second overall behind Uruguay -- to legalize recreational cannabis. Canada is, therefore, something of a legalization guinea pig for the rest of the industrialized world to watch and potentially follow.
Chief among the statistics that investors watch closest are Canada's monthly cannabis sales.
Canada's marijuana sales in June hit a record high
Last week, Statistics Canada released its monthly data on retail sales for June, with the country logging its highest marijuana sales figures to date. Below you'll find the progression of cannabis store sales since October 2018, as announced by Statistics Canada (all data is reported in Canadian dollars, with U.S. dollar equivalency in parenthesis):
- October 2018: CA$53.68 million ($40.26 million)
- November 2018: CA$53.73 million ($40.3 million)
- December 2018: CA$57.34 million ($43.01 million)
- January 2019: CA$54.88 million ($41.16 million)
- February 2019: CA$51.66 million ($38.75 million)
- March 2019: CA$60.94 million ($45.71 million)
- April 2019: CA$74.58 million ($55.94 million)
- May 2019: CA$85.81 million ($64.36 million)
- June 2019: CA$91.13 million ($68.35 million)
Added up, licensed cannabis store revenue has tallied CA$583.75 million ($437.84 million) in the 8.5-month period since adult-use sales began in our neighbor to the north on Oct. 17. This should put Canada on track for perhaps CA$900 million (about $675 million) -- if not a tad bit higher -- in sales for its first full year.
Supply issues are going to take a while to sort out
However, the roughly 6% sequential monthly sales growth in cannabis store sales in June doesn't tell the full story of the supply challenges Canada is currently contending with.
To begin with, Health Canada began the year with a monstrous backlog of cultivation, processing, and sales license applications for review. It often takes the regulatory agency many months, if not more than a year, to give the green light to a cultivation application, meaning it can take well over a year for a grow farm to become licensed to grow and sell cannabis. Some of the biggest growers in the world have been stymied by this licensing process, including Aphria (NYSE:APHA), which has been waiting for cultivation license approval for its Aphria Diamond facility for more than a year. Aphria Diamond will comprise 140,000 kilos of the company's 255,000 kilos of peak annual production.
If there is good news, it's that Health Canada has made changes to the application process to whittle away at its backlog. Growers now need to have their grow farms constructed and ready for inspection prior to submitting their cultivation license application. This should help remove underfunded growers from the equation and expedite the review process, but it's going to take Health Canada many quarters to work through its backlog.
In addition to supply issues created by licensing backlogs, Canada has been dealing with compliant packaging shortages. Health Canada laid out a laundry list of requirements that compliant packaging would need to follow in order to make it into licensed cannabis stores, and there simply hasn't been enough in the early going.
Making matters worse, despite some cannabis stocks having a substantive international presence, overseas sales have been virtually nonexistent because of these early stage supply and packaging issues. International sales are unlikely to pick up until demand in the Canadian market is being met, and that's probably not going to happen for many more quarters.
Investor expectations for pot stocks were always too high
All of these early stage problems for the Canadian cannabis market circle back to the reality that next-big-thing investments need time to mature.
Over the past quarter of a century, we've seen incredible rallies regarding blockchain, 3D printing, genomics, and business-to-business e-commerce, to name a few hot trends. However, each and every one of these rallies eventually came to a crashing halt. This isn't to say that companies within these industries weren't eventually fantastic long-term buys. But it does demonstrate that investors have a history of unrealistic expectations when it comes to next-big-thing industries -- and cannabis is no different. I don't doubt that cannabis sales can ramp up substantially over the long run, but with no precedence to a legal industrialized country, there will be bumps in the road.
Because of their premiums, the most popular pot stocks are likely to be the most exposed to wild swings lower in valuation. That means shareholders of Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), and Cronos Group (NASDAQ:CRON), which are three of the 11 most-held stocks on online investing app Robinhood, should be taming their near-term expectations.
In recent months, profit projections for all three companies have plunged. Aurora Cannabis, once expected to generate a modest profit of CA$0.10 per share (that's 10 Canadian cents) in fiscal 2020, is now forecast for a loss of CA$0.08 per share. Three months ago, Canopy Growth was forecast for CA$0.38 in full-year profit for fiscal 2021. Now Wall Street projects a loss of CA$0.73 per share. As for Cronos Group, its consensus estimate for 2020 has shrunk to a CA$0.01-per-share loss.
Even though Aurora Cannabis, Canopy Growth, and Cronos Group have all made intriguing acquisitions, pushed into foreign markets, and look to have the tools to succeed over the long run, supply and packaging issues have impacted all three pretty noticeably in the near term, and these headwinds aren't going to disappear overnight. Temper your expectations with cannabis stocks, and you won't be disappointed.