Why the Cannabis Sector is overvalued and Companies are doomed to fail.
This is my first Post of this Sort and it is supposed to trigger a constructive discussion of the Sector as a whole aswell as individual Companies, thats why i chose the provoking Title. I wrote this Post as a Contrast to the echo Chamber, which the Sub has become instead of actually having an discussion. If you don’t like or agree to the things i have to say please disagree or correct me in the Comments but be constructive about it. Im open to criticism.
Lets first address the Macro economic difficulties, which the sector has to face.
Legalization in some Countries might be further away as people expect and definitely certain Companies expect. For example the german government recently agreed to legalize Cannabis in their coalition contract and i already saw people on this sub hyping it up and saying that Company XYZ will moon because of this. The problem is that Germany is a very bureaucratic country and new Law drafts take time. A „legalization“ like the one currently in place in the Netherlands, which relys on grey zones in the law to function will not be applicable for Germany. Also historically speaking a lot of promises in the coalition contract are not actually implemented and the current one is more ambitious than ever. Stating that the Tax rates will not be increased aswell as a lot of Government Subsidies towards Ev; digitalization; etc the contrast to this that they actually want to reduce National Debt. These are two Contrasts, which can’t easily be achieved.
Some Countries haven’t even considered legalizing marijuana even if the pressure from around the world rises.
All of this will later be important when we talk about the production and sector as a whole so keep it in mind.
The negative sites of Cannabis.
Most people ever talk only about the positive aspects of cannabis consumption and leave out the negatives. With Arguments like „Alkohol kills people weed doesn’t“ any criticism will directly be disregarded. I will not elaborate on this further because i want to focus on the sector as a whole not cannabis as a product.
This next sector will focus on Canada as an example but its applicable to most other countries where weed is legal.
High Supply – Low demand
Canada alone has 776 Producers of Marijuana, which invest heavily in scaling up production, which might be bad idea because the demand does not cope with the supply.
2 of the top Marijuana Companies have an annual production so high that it can satisfy 70% of Canadas Consumption.
80% of produced Cannabis is not being sold and is wasted.
The quality of product will rise across the board so the main point of selling will be the price. The cannabis industry is already full of competition. Experts say that by 2024 the price of cannabis might sink to as low as 5$ per gram or even further.
This high supply in combination with the commoditization will lead to sinking prices and thus will lead to tumbling profit margins.
Many people might argue that demand will rise as soon as other countries legalize. The first thing we touched upon earlier is that legalization might be further out than some people expect. Second of all these Countries will have Marijuana producers themselves and thus contribute to an already oversaturated market and then again the transport cost of foreign cannabis will even further decrease the profiting margins.
Most Marijuana companies have yet to turn a profit and are losing money annually. If you factor in the future Market evolution some companies might go under and those who do prosper might not even be founded yet. The operational risk of these companies is very high.
Valuation The valuation of marijuana companies is insane even if the fell rapidly over the last year. Some even trading at 10-30x Sales ratio. Even leaving out Earnings ratio just because most of them dont earn a dime. This valuation obviously priced in future growth of the sector as a whole which like already discussed might be slower than anticipated.
Tldr: The cannabis sector is oversaturated and with prices of cannabis destined to go down because of of the high supply the profit margins will dwindle
Submitted January 14, 2022 at 04:25PM by Much-Suspect
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