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Marijuana stocks: why are they struggling so much?

By Connor Freitas

With oversupply and stiff competition from illegal rivals, it’s been a tough time for marijuana stocks – and investors are getting impatient.

Marijuana stocks were meant to have a big year in 2019. The debate around legalisation has reached a fever pitch. In the US, a handful of states including Colorado and California have already taken the leap – making recreational and medical use legal. Others are attempting to follow suit, and given how America is the most profitable market for marijuana in the world, many argue that relaxing federal laws could result in a much-needed injection of tax revenue.

As a result of these changing attitudes, the cannabis industry was widely seen as the place to be for investors. But pot stock companies have been struggling of late, with many suffering double-digit losses since the start of the year. Right now, some are only worth a third of what they once were. Brands such as Canopy Growth have been expanding rapidly, but their aggressive growth has not been rewarded with bumper sales or profits. Companies such as Canopy are grappling with massive supplies of unsold pot – and even last year analysts were warning this surplus could trigger huge writedowns.

So: if there’s such an appetite for marijuana, why isn’t the legal cannabis industry raking it in? Well, in short, it’s because legalisation doesn’t result in the eradication of the black market. Indeed, law enforcement agencies in California say illegal sales are thriving – and even expanding – despite the fact that obtaining pot from bona fide businesses has never been easier.

Legitimate cannabis companies often have to negotiate a plethora of hurdles before they can greet their first customer. Start-up costs are high and licensing fees are eye-watering, and that’s before taxes have even been taken into account. Illegal outlets that don’t have to contend with these overheads can sell their supplies cheaper and, to compound the problem, black market vendors are often given equal status on the underground sites used to review the quality of cannabis. This has led to the legal cannabis industry being put into the bizarre position of urging law enforcement agencies to ramp up their efforts to shut down illegal operations – arguing they are taxpayers and their businesses are suffering.

All of this brings us back to why pot stocks news has been such grim reading of late. It could be argued that this industry has found itself in the same situation as tech darlings such as Uber, Lyft and Slack – they are all haemorrhaging money and investors are getting impatient because they want to make a profit.

It’s also fair to say that pot stock companies have ended up suffering as a result of the recent spate of vaping deaths across the US. More than 2,170 people have sustained lung injuries after using e-cigarettes, with 42 killed. Many of those who lost their lives were using liquids that exclusively contained THC, a shorthand term for the main psychoactive substance that’s found in cannabis.

Is pot stock investing a good idea?

The future success of marijuana stocks in the US seems to hinge on whether there is any appetite for the federal ban on cannabis to be lifted.

In mid-November, the cannabis industry was given a glimmer of hope when it emerged that a congressional committee is exploring a bill that would do exactly this – as well as overturn those who have past convictions. Some politicians are frustrated that nationwide laws are so behind given that a considerable number of states have legalised, or are planning to legalise, such substances. Others argue that existing legislation tends to disadvantage people of colour – damaging their future employment prospects.

Alas, it’s much too early to be popping the champagne corks just yet. The next step for such a bill would be approval by the Senate, controlled by the Republicans, who have already thwarted proposals that would protect the banks that provide cannabis retailers with business accounts.

With many pot stock companies missing their quarterly estimates and slashing their targets for the future, it seems that the cannabis industry bubble is about to burst. Several listed brands have already announced job losses and painful restructuring plans which will reduce the number of new store openings – and analysts at specialist publications such as Marijuana Business Daily believe that the industry is far from hitting rock bottom yet. Some experts fear that some businesses could descend into bankruptcy as 2020 gets into full swing – likely because they will struggle to raise new capital from investors who have been burned before.

Others, such as Canada’s biggest cannabis grower Aurora, are making the difficult decision to dilute stock, diminishing the returns that existing shareholders can expect. Indeed, since the start of 2017, the number of shares issued and outstanding has more than trebled.

It could be argued that it’s simply too early to know whether marijuana stocks are going to bear fruit. In many territories, legalisation remains relatively new – and the accompanying legislation that makes it easier for businesses to operate has been slow to catch up. Nonetheless, there’s little arguing that the next few months are going to be turbulent for the cannabis industry and it’s possible that some businesses will be unable to survive.

FURTHER READING: Vaping deaths: What does this mean for the e-cigarette industry?

FURTHER READING: Market predictions: will 2020 bring riches or a recession?

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