Cannabis stocks went gangbusters last year. It was possible to turn $10,000 into $100,000 in a matter of months.
This year, the story changed completely. Since the summer, most cannabis stocks have fallen by at least 50%. Some have lost 90% of their value.
While the pain has been difficult, it should have been expected. Every emerging market opportunity goes through periodic booms and busts. However, the long-term promise remains strong. Most analysts still expect global sales to reach $100 billion by 2030. Others believe the market value could ultimately approach $300 billion.
Building something unique
Cannabis is full of opportunity, the most obvious of which includes traditional flowers and concentrates. These are the segments that have spawned multi-billion-dollar markets throughout North America.
Yet smoking marijuana isn’t the only option. On October 17, 2019, a range of additional form factors were legalized in Canada, including cannabis-infused edibles, beverages, candy, baked goods, lotions, and balms. In many respects, these categories could ultimately be worth several times traditional flowers.
Consider the global cigarette market, a good analogy to traditional methods of smoking weed. This year, Canadians purchased roughly $19 billion of tobacco products. Meanwhile, the alcohol market, analogous to the potential of cannabis-infused beverages, was worth around $35 billion.
These statistics also play out on a global stage. Worldwide tobacco sales total around $1.06 trillion, while the global alcohol industry is worth $1.75 trillion.
The lesson here is simple: if you want to capitalize on cannabis growth, don’t simply focus on companies creating smokable marijuana products. Competitors like Canopy Growth, which partnered with beverage giant Constellation Brands, is targeting cannabis-infused beverages with enthusiasm, but this still only represents one market opportunity.
What you really want is a company capable of targeting traditional cannabis and areas like cosmetics, edibles, beverages, medicines, and more.
Capitalize on everything
Most pot companies are either scaling grow operations to sell cannabis at wholesale prices or creating new cannabis brands, hoping to build customer loyalty. Hexo is building something different.
If you’re familiar with Shopify, one of the most successful stocks in Canadian history, you should know about its platform strategy. Instead of building every aspect of its e-commerce suite itself, Shopify simply created the base infrastructure, which then allows outside developers to build on top of it. This allowed Shopify to scale faster than any other competitor, because it could tap into millions of developers worldwide.
Hexo is doing the same thing with weed. Instead of building all of its own cannabis brands from scratch, it’s partnering with existing brands that are already loved by consumers. Hexo provides all of the base infrastructure, including grow facilities, a research and development centre, and packaging and distribution capabilities. Any outside brand can tap into this infrastructure to co-create cannabis products quickly, safely, and cheaply.
Hexo already has a deal with Molson Coors Canada, which will launch its first cannabis-infused drinks this month. In 2020, it hopes to secure additional deals in new verticals like edibles, sleep aids, cosmetics, and more.
Hexo’s platform model is the only strategy capable of capitalizing on every cannabis opportunity. It has the potential to scale faster than every competitor and can hit the market with well-known, trusted brands.
From mid-2016 to mid-2019, Hexo stock rose 20 times in value. A $5,000 investment would have become $100,000. Shares have fallen 75% since the recent bear market began, setting the stage for another massive run. If Hexo can secure valuable partnerships in 2020, validating its platform model, expect the ability to generate $100,000 in profit by investing just a small fraction of that amount.
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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.
Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Constellation Brands, HEXO., and HEXO. Fool contributor Ryan Vanzo has no position in any stocks mentioned.