Is the Cannabis Industry Getting Too Crowded?

Canopy Growth Corp. (TSX:WEED) and Aurora Cannabis Inc. (TSX:ACB) are the big names in the cannabis industry today, but how long will that last?

| More on:

Pot stocks haven’t been off to a great start to 2018, but the hype in the industry isn’t dying down just yet, and we might actually be seeing too much of it. With so much fragmentation already present in the industry, it could chip away a lot of the potential that big stocks, like Canopy Growth Corp. (TSX:WEED) and Aurora Cannabis Inc. (TSX:ACB), have. And while we could still see those industry giants acquire some of these new companies, the volume and the amount of cash needed to do so are two very big obstacles.

New competitors keep entering

We’re even seeing The Second Cup Ltd. (TSX:SCU) look to jump into the industry. The coffee chain has partnered with a cannabis company as it hopes to have dispensaries all across the country. And while coffee drinkers and pot smokers might be two very different customer types, the company’s experience will certainly give it an advantage over novices in the industry that may not be aware of what’s involved and the challenges of managing many different locations.

Even south of the border, where pot is still illegal at the federal level, we’re seeing cannabis companies start to pop up, despite significant legal challenges. Recently, Golden Leaf Holdings Ltd. made its very ambitious targets public, as it expects to saturate the market. Cannex Capital Holdings Inc. is another stock vying for market share in the U.S., as the recently listed company owns the biggest producer of cannabis in Washington State.

Is there enough market share to go around?

There’s a lot of ambiguity about how big of a market the cannabis industry will be. For one, it’s unclear just how successful legal entities will be in keeping pot sales from the black market and how restrictions on how pot is sold will impact potential consumers. The pot industry in Canada is definitely not large enough for all these companies to be able to survive, and that’s why a company like Canopy has looked to expanding and partnering into other parts of the world and try and gain first-mover advantages.

With advertising being a challenge, consumers might be overwhelmed with choice, and that could present a big obstacle for cannabis companies that are trying to grow sales.

Low barriers to entry creating significant competition

Companies are able to easily get started in the industry, as there are minimal capital requirements, and obtaining a licence for pot is the only real obstacle that potential growers face today. With ease of entry comes lots of competition, and that means a limited competitive advantage for today’s market leaders. All it could take to shake up the industry is for a big company, say, a pharmaceutical or tobacco company, to enter the market and start buying up pieces of a very fragmented industry and position itself ahead of big names like Canopy and Aurora.

Takeaway for investors

There’s a lot of uncertainty in the industry today, and a lot will change, even in the next 12 months. Investors should be careful not to ignore the risks involved with investing in cannabis.

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 of the stocks mentioned.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »