By 2027, the cannabis industry could be worth $82.3 billion, according to MarketsandMarkets estimates. Many analysts are predicting significant growth in the sector as countries and states fully or even legalize it for medical use, opening up more opportunities around the world as a result.
But that’s no guarantee, and these growth projections are based on a number of assumptions. No one knows when legalization will actually take place in the United States or other parts of the world.
For investors, the question arises as to whether it is too early to invest in the cannabis industry. Until legalization takes place in top markets like the US, companies may be scrambling to find opportunities for growth.
And by the time legalization happens (and even if it does), the industry could look very different. Below we look at some of the risks of investing in this sector today and whether it makes sense to do so.
Many marijuana companies are in the red
Often times when we see a marijuana company reporting positive net income it is due to gains from revaluation of inventory or non-operating items. deficit.
TLRY Net Income (Quarterly) Data by YCharts.
Lack of profitability doesn’t always hurt the cannabis industry, as investors admit it takes longer to reach breakeven. However, a significant problem with a consistently unprofitable business is that it can lead to large cash outflows.
Cannabis companies often burn large amounts of cash
If a business is not generating positive cash flow from its day-to-day operations, it can lead to dilution as it may rely on equity offerings to raise cash unless it has a large amount of cash.
TLRY Cash From Operations (TTM) data by YCharts. TTM = Trailing 12 months.
canopy growth (CGC 1.65%) We have a terrible track record when it comes to cash burn, but thanks to beer makers constellation brands We invested $4 billion in the company in 2018, and it’s not dire. As of September 30, 2022, Canopy reported cash and short-term investments totaling C$1.1 billion ($821.9 million). We won’t be short of cash anytime soon, but the situation isn’t sustainable. Sooner or later, lack of funds can become a major problem for your business.
stopped growing
Perhaps the most troubling trend in the industry is that these companies can no longer even count on consistent sales growth. Earnings growth was often enough to excuse the lack of profitability. But with that seemingly gone, investors are wondering if cannabis stocks are worth buying, at least for now.
TLRY Revenue (Quarterly YoY Growth Rate) data from YCharts. YoY = YoY change.
Excluded SNDL (SNDL 1.30%) from the chart above because that result skews the data. The company has experienced incredible growth, which has been achieved by relying heavily on acquisitions.
Most investors should avoid the industry now
The main argument for investing in cannabis stocks centers on the promise of growth and long-term potential. But that could be a risky strategy, as it depends heavily on the US’s desire to legalize marijuana at the federal level. There is no guarantee that it will happen anytime soon. During that time, losses can escalate and businesses run out of money.
It is too early for most investors to invest in the cannabis industry. As many investors have already experienced, there is a significant risk that they may suffer large losses while waiting for legalization.
Unless there are many years of investment left (at least 10 years) and you are comfortable with the high risks involved in investing in cannabis companies, assuming that legalization does happen in the United States, it is likely that legalization will actually occur. It is better to wait until it is done.
David Jagielski has no positions in any of the mentioned stocks. The Motley Fool holds positions with and recommends Constellation Brands. The Motley Fool US Headquarters recommends Sndl. The Motley Fool’s U.S. headquarters has a disclosure policy.
