Even though marijuana has been legal in Canada for over a year, cannabis stocks have lost half their market value. Although “cannabis 2.0” launches Thursday, legalizing marijuana derivatives including edibles, beverages, extracts, and vape pens, the market may still be in for a “bumpy ride”, reports Reuters.
Although cannabis 2.0 takes effect on Thursday, actual sales of the products it legalizes won’t begin until December.
As noted by Reuters, share prices in the Horizons Marijuana Life Sciences Index ETF have slumped as companies’ revenues missed expectations. Cannabis producers, investors and analysts have blamed Canadian regulations that have slowed the opening of new retail outlets, strangled sales and imposed higher costs. Investment bank and advisory firm Seaport Global figures Canada needs about 1,055 stores to realize the cannabis market’s true potential. About half that number currently exist, with about 300 of those stores in Alberta, which has looser regulations than the rest of the country, while the most populous provinces of Ontario and Quebec have lagged far behind.
“We would probably give the first year a C minus,” said Seaport Global analyst Brett Hundley, giving the industry performance a barely passing grade.
The slow roll-out of stores “creates a real problem for Canadian licensed producers, because they’ve expanded rapidly with cultivation and production facilities and have nowhere to go,” he added. Lackluster results from cannabis producers “will continue and potentially worsen,” Hundley cautioned.
Canada’s biggest cannabis companies including Canopy Growth and Aurora Cannabis reported larger-than-expected losses in the latest quarter and pushed back their timelines to profitability, blaming their woes on the need for more stores to sell their wares, claims Reuters.
Regulations for the new marijuana products market, which include restricting each package to 10 milligrams of THC will add to companies’ costs, said Ryan Greer, co-chairman of the Canadian Chamber of Commerce’s National Cannabis Working Group, which is made up of Canadian marijuana companies.
With each province responsible for its own retail rules and taxes, the fragmented approach to regulating the industry will continue to raise costs and create distortions in the market, Greer said.
One such distortion is evident in prices, with the consumer paying far higher prices for legal weed, according to industry experts.
“Too high a level of taxation at the inception of a legal consumer system can be a disincentive for consumers to make that move from the black market to the legal market,” said Aurora Chief Corporate Officer Cam Battley. Challenges facing the industry and disappointing financial results have spooked investors who had piled into the sector amid initial euphoria in the run-up to the legalization of recreational cannabis last Oct. 17.
“Now, this year these companies are coming more under the microscope by investors and people are saying, ‘hey, when are you going to start making money?’” said Andrew Kessner, an analyst at William O’Neill & Co.
For a new sector and industry, the current investor sentiment is a bump in the road, Loui Anastasopoulos, TMX Group’s president of capital formation for equity markets told Reuters.
“Valuations got ahead of themselves and this is a reset … but we do expect capital will flow back into the industry,” Anastasopoulos said.
Emily Paxhia, the co-founder of Poseidon Asset Management, echoed those comments, adding that “future capital is going to expect a more prudent approach.”
An investment in excess of $4 billion in Canopy led brewer Constellation Brands to report a quarterly loss this month. But Canopy Chief Executive Mark Zekulin remains optimistic about the long-term prospects for the industry. “It takes a lot of capital money, a lot of operating money, bringing these large facilities up to scale,” Zekulin told Reuters.
“But at the end of the day,” he said, “the multi-100-billion-dollar cannabis opportunity that existed yesterday still exists today.”