In case you’ve been living under a rock for the past couple of years, the marijuana industry is all the buzz on Wall Street. In roughly 2 1/2 months, Canada is set to become the first industrialized nation in the world to sell adult-use cannabis. This is made possible by Parliament’s passing of the Cannabis Act in June.
When recreational marijuana becomes legal, the expectation is that it’ll usher in huge demand, and therefore a lot of money for the industry. Initial figures suggest that revenue could total $5 billion annually, on top of what the industry is already generating from medical pot and exports, once the industry is at full capacity. These lofty sales projections are a big reason why pot-stock valuations were pushed into the stratosphere earlier this year.
Supply-and-demand uncertainties proliferate with legalization looming
But there are also key uncertainties associated with legalizing adult-use weed in a market as large as Canada. Namely, the supply-and-demand outlook is highly uncertain. Though demand should be strong, no one is exactly sure how much cannabis will be purchased each year.
Conversely, supply expectations have been incredibly fluid. With growers expanding as quickly as their balance sheets would allow in the first half of the year, it’s not out of the question that oversupply will wreak havoc on the industry by as early as 2020.
However, marijuana oversupply doesn’t have to be a margin death knell to pot stocks. While what few examples we have — Colorado, Washington, and Oregon — demonstrate that per-gram dried flower prices tend to be commoditized and fall precipitously not too long after the substance becomes legal, marijuana stocks that focus on alternative cannabis products can still thrive.
An “alternative cannabis product” includes oils, concentrates, vaporized cartridges, infused creams or lotions, infused beverages, and edibles. These alternatives pot products tend to have higher price points than traditional dried flower, and most importantly are commoditization-resistant. That should result in far less pricing pressure and beefier margins for growers that choose to focus on these products in addition to dried cannabis production.
It’s these alternative products that have the full attention of the alcohol industry.