There’s a new gold rush in the making, but this time, the “gold’ is green. I’m talking of course about Canada’s cannabis industry, which is experiencing big revenue growth and even bigger returns ahead of pot legalization.
Many investors see cannabis as the hot new thing to invest in–and with good reason. Whereas competing industries like alcoholic beverages are stagnant or declining, cannabis sales are going through the roof.
But as with any gold rush, we can expect the final outcome to be mixed. In the late 1990s, there was a similar flurry of activity in tech stocks, with dozens of startups reaching sky-high valuations. But when the dust had settled, only a few–Amazon (NASDAQ:AMZN), Google and eBay–actually survived.
The cannabis industry may be facing the same situation today. While all of Canada’s big pot stocks are growing, a few are emerging as clear winners (at least in terms of market share). While smaller companies like Hexo Corp and Delta 9 have some interesting deals in the works, it looks like Canopy Growth Corp (TSX:WEED)(NYSE:CGC) is going to be the big winner in Canada’s cannabis industry.
Like the dotcom champions of two decades past, Canopy is making big investments and focusing on growing its business. This gives it a striking resemblance to one of the survivors of the dotcom bubble era: Amazon.com.
One of the biggest similarities? Canopy’s strong focus on investing in future growth.
Massive investments
It’s no secret that Canopy is investing big in its future. Despite being one of the lowest-cost cannabis producers, it has had persistently negative earnings, the reason being that it’s spending a lot of money on infrastructure and international expansion.
When Constellation Brands Inc. invested $5 billion in Canopy, the first thing Bruce Linton did was state that he’d spend the money on becoming the #1 cannabis supplier in the 11 countries in which his company operates.
This scenario is similar to that of Amazon, which has been investing massively in fulfillment centers around the world–often at the expense of short-term profitability.
Large market share
Another similarity between Amazon and Canopy is their commitment to building market share. According to a recent article at fool.com, Canopy is building 3.7 million square feet worth of grow sites in British Columbia. This indicates that the company anticipates high demand for its products in the future–driven in large part by legalization.
By some estimates, Canopy’s 3.7 million square feet of production space would produce about 300 kilograms of cannabis a year, which would give it the largest market share in Canada by far.
Profitability issues
Last but not least, a major similarity between Canopy and Amazon is both companies’ persistent profitability issues. Although Amazon has become profitable in recent years, it look a heck of a long time to get there–a fact often criticized by market commentators who thought the company should be slimming down and paying dividends.
In the end, Amazon’s big spending paid off, as the company not only became profitable but gained a whopping 41% market share in ecommerce. Canopy is following the exact same strategy.
By investing big in growth and market share, it may eventually reward investors more than it would by staying lean and upping its earnings.
