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U.S. Cannabis Sales to More Than Quintuple by 2025, New Report Finds

By Sean Williams - Sep 29, 2019 at 11:41AM

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The United States is the marijuana industry's crown jewel, but not every company will be a winner.

As you're probably aware, cannabis has rapidly evolved into a big-money industry. According to the duo of Arcview Market Research and BDS Analytics, worldwide sales expanded to $10.9 billion in 2018, which was more than triple what was recorded globally just four years earlier ($3.4 billion). And the reality is, this is just the tip of the iceberg.

Yet when it comes to burgeoning marijuana markets, there's one that clearly stands at the head of the pack: the United States.

Even though the U.S. federal government has remained steadfast on its stance that cannabis is a Schedule I substance -- i.e., it's wholly illegal, considered prone to abuse, and lacking in recognized medical benefits -- it's been willing to take a hands-off approach to marijuana regulation at the state level. As a result, 33 states have legalized medical marijuana in some capacity, with 11 of these states also legalizing adult-use consumption.

A black silhouette outline of the United States, partially filled in with baggies of cannabis, rolled joints, and a scale.

Image source: Getty Images.

U.S. legal marijuana sales are about to skyrocket

Based on a number of Wall Street estimates, the United States projects as the largest cannabis market in the world, with perhaps a third to half of all global sales in a decade. But it's the U.S.'s projected growth rate over the next couple of years that's truly astounding.

According to a relatively new report from data analytics provider Nielsen, Brace for Impact: U.S. CPG Cannabis Sales to Rise by the Billions, U.S. legal weed sales are set to more than quintuple from the $8 billion recorded in 2018 to an estimated $41 billion by 2025.

In particular, Nielsen reminds its readers that the cannabis "umbrella" is probably bigger than folks realize. That's because the marijuana industry is about more than just dried flower. Cannabis can be delineated into its various derivatives, such as edibles, vapes, beverages, topicals, and concentrates, and targeted products can be produced from pot plants, such as derivatives containing tetrahydrocannabinol (THC), cannabidiol (CBD), or hemp oil. THC is the psychoactive cannabinoid that gets users high, whereas CBD doesn't get users high and is best known for its perceived medical benefits.

With regard to marijuana's burgeoning portfolio of products, Nielsen points out that in 2014, 77% of all legalized products sold in Colorado and Washington was dried flower. Comparatively, a mere 48% of pot products sold in 2018 in Colorado, Washington, Nevada, and California was dried flower. The remainder was comprised of vape pens (19%), edibles (11%), and other derivatives (22%). This is an excellent trend for the weed industry considering that derivative products have no oversupply or pricing concerns to worry about, making them a considerably higher-margin offering than dried cannabis flower. 

A gloved processor using scissors to trim a cannabis flower.

Image source: Getty Images.

A number of U.S. pot stocks are about to "see some green"

With such robust sales projections, you'd be correct in thinking that certain cannabis stocks are poised to profit.

The most obvious beneficiary in the U.S. would be the vertically integrated multistate operators. These are companies that operate grow farms, processing facilities, and retail stores in legalized states. Perhaps no multistate operator is better positioned to succeed than Curaleaf Holdings ( CURLF -0.65% ). Curaleaf is in the process of acquiring Cura Partners' Select brands, as well as privately held dispensary operator Grassroots. When these deals close, Curaleaf will have far more operational retail stores than any other multistate operator (close to 70), and it'll hold the second-most retail licenses of any company in the country. Curaleaf looks to be on track to become the first pot stock to top $1 billion in annual sales.

The clear push toward derivative products also stands to benefit those companies involved in extraction. As an example, Neptune Wellness Solutions ( NEPT -7.87% ) is a third-party extraction-service provider that's nabbed significant agreements for its 200,000 kilos of annual extraction capacity in Canada, and recently moved into the U.S. market via its acquisition of SugarLeaf. When Neptune's newly acquired asset is fully up to speed, it'll be capable of 1.5 million kilos of annual extraction capacity, which is perfect for an industry seeking higher-margin sales. Neptune Wellness should benefit from the consistency of its fee-based contracts.

It's also worth pointing out that accessing cash remains a challenge for U.S.-focused pot stocks. That places cannabis real estate investment trust (REIT) Innovative Industrial Properties ( IIPR -1.31% ) in prime position to succeed as the U.S. weed industry expands. As a REIT, Innovative Industrial Properties has acquired 30 properties in 12 states that it then leases out to medical marijuana growers and processors. Right now, it has an average lease length of nearly 16 years and a current average return on yield of 14.5%. In short, Innovative Industrial Properties should have a complete payback on its invested capital in five years, and is still able to pass along annual rental increases to its tenants.

A bottle of alcohol next to a potted cannabis plant.

Image source: Getty Images.

Legalization isn't a win for every company or industry

However, Nielsen's latest insights also suggest that not every company or industry is necessarily going to come out greener as legal marijuana's reach expands in the United States.

For example, it's quite possible that traditional vice industries, such as tobacco and alcohol, could actually lose sales to the green rush. Nielsen notes that 41% of tobacco smokers suggested they'd consider using cannabis as a smoking cessation tool. Additionally, about 1 in 5 beer-drinking adults affirmed that they'd spend less on store-bought beer in order to consume cannabis products.

These concerns are a clear reason behind Molson Coors Brewing's ( TAP 0.81% ) cannabis-infused beverage joint venture with HEXO, known as Truss. Molson Coors has seen its North American beer sales and market share head in the wrong direction for much of the past decade, and the company is looking for any sort of spark that could reignite growth. By being a first-mover in the cannabis-infused beverage space, Molson Coors aims to put Truss on the map with consumers in Canada, and more than likely in the U.S. at some point in the not-so-distant future.

Legalization might also be bad news for smaller U.S. multistate operators. As weed sales have blossomed, so have the number of marijuana brands in the country. Nielsen's report shows that Colorado, Washington, Nevada, and California had a combined 2,650 marijuana brands being offered in 2018. That's nearly double the amount from 2017, and a massive multiple from the 166 brands consumers had to choose from in 2014. Differentiation is going to be key in the cannabis space, and underfunded growers that don't have the capital to stand out could miss out.

There's no doubt that cannabis sales are headed in the right direction in the U.S.; just understand that not every company is going to be a winner.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Molson Coors Beverage Company Stock Quote
Molson Coors Beverage Company
$45.75 (0.81%) $0.37
Neptune Wellness Solutions Inc. Stock Quote
Neptune Wellness Solutions Inc.
$0.41 (-7.87%) $0.04
Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
$252.50 (-1.31%) $-3.36
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
$9.23 (-0.65%) $0.06

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