As well as Canada’s October legalisation of marijuana for recreational use South Africa this week legalised the drug. The domino effect that is now gathering pace around the world when it comes to dropping legal restrictions on the consumption of cannabis, either within the context of medical use or recreationally, is also exciting those investing online.
Stock market investors are piling into ‘pot stocks’, most of which are listed on Canadian stock exchanges, though a few have also now ventured south to Wall Street.
In many ways the euphoria is well-founded. The last time a market of comparable size, with proven demand, was suddenly brought into the ‘white’ economy was the end of Prohibition. People have been smoking marijuana, or consuming it in myriad other ways and in different forms and for different reasons, for centuries if not thousands of years. However, as the result of what many consider a quirk of history and fate, it’s been a criminal offence to buy or sell the drug for the past several decades. But that’s now changing. An increasing body of evidence around its medicinal properties and a changing of attitude around its recreational consumption has seen a process of legislative change around the world that is quickly gathering pace. The value of the legal marijuana market is forecast to hit $146.4 billion by 2025.
However, while the future size of the market is almost certainly huge, there are concerns that investors are currently putting the cart in front of the horse when it comes to the valuations that listed companies in the industry are being driven to. With such a new industry it is, at this point, difficult to forecast which companies will be successful in growing their market share, have strong business models, diversify and many other unanswered questions. And current valuations as multiples of current revenues are often taking quite a risk on the future profitability of the companies.
On Wednesday, the market cap of Canadian marijuana producer Tilray doubled in a single day based on intraday levels. While it closed at a gain of 38.1% in the end, that is still almost unheard of growth for a listed company. The company is now valued at $20 billion, twice that of Burberry, and last year recorded a $7.8 million loss. It is also a mere 5-years old.
The message to those investing online should be one of restraint. Look closely into the companies, their management and assess potential. The legal marijuana market will certainly be huge and there will be huge opportunities. However, current euphoria and valuations are all starting to look overheated and dotcom-bubbly and treading carefully advisable.