In 1999 and 2000, the U.S. and Canadian stock markets were on fire as investors made huge gains in a new sector: the technology sector.
As many remember, a number of new companies came to market through the initial public offering (IPO) process. During these times, company founders, employees, and investors who received an allocation in the IPO had the opportunity to make a significant amount of money. The problem that came afterwards, however, was the market eventually realized the fundamentals of the large majority of these companies simply didn’t exist. There was no plan to make profit, let alone make revenues.
While the times were very exciting, the bubble burst soon thereafter, dragging the fate of the entire economy down with it. There was, however, an upside to the bubble.
What was the good news?
In the case of most bubbles, many participants who otherwise would not have been involved were brought into the industry. In the case of the technology bubble, people who never would have used computers or the internet were employed by these now defunct firms. More people became educated about a niche that became mainstream.
Further, when consumers look at what the internet was capable of before 2000 vs. after 2000, there is a substantial difference. The infrastructure of the internet took leaps forward in a very short period of time. Investors and consumers have benefited from this quite significantly in the 15 years or so that have followed.
What is the bad news?
As most already know, business is a lumpy process. While the internet and the technology industry has flourished, investors did not have a smooth ride to reach this point. After the bust of the technology industry, investors lost money, employees lost jobs, and founders lost companies. Of the early participants in the industry, there are very few who remain as most either went bankrupt or merged into more successful operations.
How will this play out in the marijuana industry?
The marijuana industry is still in high growth mode. With a significant amount of investments being made in the infrastructure to grow the industry’s output capacity, investors and employees are still enjoying good times. In the case of Canopy Growth Corp. (TSX:WEED), cash flow from operation is still negative while the company builds greenhouses and acquires new clients. This in spite of reporting positive earnings per share.
The capacity and the business model are being refined, so the industry can eventually reach a point of profitability and sustainability.
The danger faced by investors is very similar to that of the technology industry in 2000. Business is a lumpy process!
Investors purchasing shares in any company, such as Canopy Growth Corp., in a new and growing industry must understand the risk and be ready to remain patient for a very long time. Before profitability may come a boom and a bust.
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Fool contributor Ryan Goldsman has no position in any stocks mentioned.