This Report Should Have Cannabis Investors Worried

Why Canopy Growth Corp (TSX:WEED) and other pot stocks might find growth in the industry to be a challenge.

| More on:

Much of the hype around pot stocks and the basis for their high valuations has been centred around the growth that is expected in the industry. However, a recent report from Statistics Canada suggests the industry may not be all that big.

The black market for cannabis in 2015 was estimated to be worth $6.2 billion, which is less than the wine market. Although the wine industry is worth an estimated $7 billion, other than Andrew Peller Ltd, which doesn’t have a big market cap by any means, there aren’t many big wine companies listed on the TSX.

Why does this matter?

Given that Canopy Growth Corp (TSX:WEED) already has a market cap of $4.4 billion by itself, and Aurora Cannabis Inc (TSX:ACB) is valued at over $3.2 billion, these two companies combined are already valued higher than the entire industry.

Aphria Inc adds another $2.3 billion to the pool, and there are still many other cannabis stocks on the TSX, with more pot companies likely to be listed as we approach the legalization date.

This is just further proof that these stocks are too highly valued and that the market is simply not big enough for all of these companies to experience the significant growth that would be needed to justify their valuations.

Where will the growth come from?

Certainly there is no guarantee that the $6.2 billion figure is correct, as by definition it would be difficult to ascertain the size of a black market. However, even if the industry were $8 billion or $9 billion, that’s still less than the market cap of the aforementioned three companies.

The assumption for investors is that legalizing marijuana will create new demand and build on existing users. However, I’m skeptical that this will be the case. I’ve never smoked pot in my life and I can’t image I ever will regardless of whether it is legal or not.

While the legalization may tempt some to try cannabis, it’s hard to see how that would drive significant growth in the industry. After all, I’ve yet to come across someone who wanted to smoke pot and didn’t because it was illegal to do so.

Edibles could offer another avenue for growth – but will it be enough?

While regular pot smoking might not offer significant growth opportunities, if edible marijuana is legalized,that could certainly increase the size of the industry.

However, the high valuations that cannabis stocks trade at suggest that the growth would have to be exponential for these companies not to be overvalued.

What should investors do?

At the current valuations, it’s hard to miss the pot bubble that is forming. Although the share prices may very well continue to rise, stocks are getting very expensive given the limited amount of sales and the lack of profits that have been generated thus far.

There is a lot of optimism that is fueling cannabis companies. At this point it’s hard to view pot stocks as being anything more than a speculative buy. There could be some upside in the short term, but beyond that, investors are exposing themselves to significant risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any stocks mentioned.

More on Investing

Arrowings ascending on a chalkboard
Investing

5 Canadian Stocks That Have Gained Value Year to Date

Although many Canadian stocks have sold off this year, and by a significant amount, here are five that have actually…

Read more »

Filling up at the gas pumps.
Energy Stocks

Gas Prices Are Hitting Record Highs: 2 Stocks to Buy Now!

Buy Suncor Energy stock, Canada's integrated oil and gas giant that's benefitting immensely, as gasoline prices continue to soar.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Bank Stocks

A Different Bank for a Comfortable Retirement

Want a comfortable retirement? Investing in this different bank today can help you reach that goal through a solid income…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Top Canadian Dividend Stocks to Buy and Hold for the Long Term

These Canadian companies have been paying dividends for more than four decades and have been consistently growing the same.

Read more »

thinking
Bank Stocks

Bank of Montreal (TSX:BMO) Raises Dividend: Is the Stock a Buy?

Bank of Montreal is about to get a lot bigger. Should you buy the stock?

Read more »

man window buildings
Investing

Where Do Economists Expect Canadian Housing Prices to Fall Most?

Canadian housing prices may be falling -- in some regions, more than others -- but there are still plenty of…

Read more »

Business success with growing, rising charts and businessman in background
Energy Stocks

3 Hydrogen Stocks Set to Become Major Multi-Baggers

These three hydrogen stocks could certainly achieve multi-bagger status in the years to come after they overcome the present-day hurdles.

Read more »

Technology
Stocks for Beginners

Starting an Investment Portfolio? Buy These 3 Stocks!

Interested in getting a start in the stock market? Buy these three stocks today!

Read more »