There's a bigger buzz about the marijuana industry than ever before. Thanks to a recent vote in Oklahoma, 30 states now have laws in place that broadly allow the legal use of medical marijuana. Nine states plus the District of Columbia have legalized recreational marijuana, with Michigan potentially joining their ranks pending a vote on the issue in November.
That's just looking at home in the United States; Canada's recreational marijuana market opens nationwide in October. Germany, the largest economy in Europe, has an expanding medical cannabis market. Other countries across the world are relaxing laws to allow the legal use of medical marijuana.
With the rapidly changing landscape seemingly pointing toward continued growth in the marijuana industry, is it time to invest in marijuana stocks? We asked two of The Motley Fool's contributors who regularly cover the cannabis industry to address this topic. Here's what they had to say.
Is this a viable business?
Keith Speights: The short answer to this question is "absolutely." The longer answer is that how viable the marijuana business is depends on the country. The marijuana industry is definitely viable in Canada and Germany, two developed countries that have legalized cannabis at the national level. There are marijuana growers operating quite profitably in these markets, notably including one of the larger players, Aphria (NASDAQOTH:APHQF).
As for the market investors probably care about the most -- the U.S. -- the answer is still "yes." There are certainly serious constraints for the U.S. marijuana industry, particularly with onerous federal regulations about how banks can interact with marijuana businesses. However, there's also a lot of money being made. Last year, $8.5 billion was spent on legal cannabis in the U.S., according to ArcView Market Research and BDS Analytics. That's more than Americans spent on ice cream in 2017.
I think the question you have to ask about the continued viability of the marijuana industry in the U.S. is whether it's likely that the federal government will attempt to intervene in states that have legalized either medical or recreational marijuana. In my view, that likelihood is pretty low and is getting even lower. There were concerns that Attorney General Jeff Sessions might initiate a federal crackdown on marijuana, but President Trump's public commitment to supporting legislation to let states enforce their own laws appears to have largely laid those fears to rest.
Sean Williams: Today, medical cannabis is legal in more than two dozen markets worldwide -- yet it remains a wholly illicit drug in what would be the most lucrative market in the world, the United States. In countries like Canada, and in states such as Colorado, Washington, and Oregon, the business model does appear to be viable on paper, but it's clearly not without some serious drawbacks that investors need to be aware of.
For example, until Canada passed the Cannabis Act on June 19, practically all marijuana-based businesses had little or no access to basic banking services. It's not that banks had no desire to work with the burgeoning marijuana industry, it's that banks feared criminal and/or financial repercussions if they offered a line of credit, or even a checking account, to a cannabis-based business. In fact, in the U.S., the Senate Appropriations Committee voted to block a banking amendment (21 to 10) last month that would have allowed banks to do business with marijuana companies that were complying with respective state cannabis laws. This lack of access to traditional sources of capital could have a long-term adverse impact on marijuana stocks.
Profitable marijuana businesses also face an unwelcome surprise in the U.S.: Uncle Sam. Despite being an illicit drug, the federal government has no qualms about taxing the income of cannabis businesses operating in states where it has been legalized. What's more, a more than three-decade-old tax section, known as 280E, prohibits businesses that are selling a federally illicit substance from taking normal corporate income tax deductions. This can result in an effective corporate income tax rate of as much as 90%!
So yes, the business model is viable on paper and shows plenty of promise, but it faces disadvantages that seemingly no other industry will have to contend with.
What does the market look like?
Speights: Again, the answer to this question depends on the country. In Canada, there are a handful of larger marijuana growers with significant production capacity. Canopy Growth (NYSE:CGC), Aurora Cannabis (NASDAQOTH:ACBFF), and Aphria rank at the top. There are also dozens of smaller marijuana growers in Canada, several of which are listed on the Toronto Stock Exchange. In the U.S., most marijuana businesses remain privately owned.
The marijuana industry encompasses more than just marijuana growers. Suppliers are also part of the ecosystem. Kush Bottles, for example, focuses on selling packaging supplies to cannabis dispensaries and growers in the U.S. Scotts Miracle-Gro (NYSE:SMG) has been gobbling up smaller hydroponics companies and now stands as the go-to supplier for marijuana growers.
There has also been interest from larger companies that previously haven't been involved in the marijuana industry. Last year, Constellation Brands, a large alcoholic beverage maker, bought a 9.9% stake in Canopy Growth. Molson Coors Brewing is reportedly in talks with several other Canadian marijuana growers about an investment and partnership deal.
I don't think the marijuana industry of the future will look the same as today. My view is that we will see more consolidation in Canada. I expect more U.S. companies will opt to list on major stock exchanges. With Constellation Brands already in the fray and Molson Coors perhaps joining as well, I suspect other alcoholic beverage companies may invest in and could potentially even acquire marijuana growers.
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