Rush to Enter The Cannabis Market Poses Risk to Entire Sector

Don’t say we didn’t warn you. With over saturation, black market competition,  and a rush to enter the market driving prices to rock bottom lows, it’s going to be hard for cannabis businesses to turn a profit this quarter. 

The cannabis industry is full of Green Rushers — a particular segment of novice investors rushing to enter the marijuana sector — who have the potential to disrupt the entire market.

At first glance more investment hardly seems problematic, but digging deeper it becomes obvious: if the amount of cannabis production is left unregulated, the Green Rush will ultimately lead to an over saturated market.

In fact, just yesterday, world renowned hedge fund manager of Vinik Asset Management, Jeffrey Vinik, dismissed the cannabis sector, calling the craze overrated. Further, Vinik argues that a rush to enter into cannabis investments will create a situation where market demand is overserved and margins become too tight to turn a profit.

For example, Oregon, whose pot prices plunged as much as 50% last year, is already experiencing this phenomena. Prices for this year are expected to drop another 35-50%. To make matters worse, Oregon is sitting on 1.3M pounds of unsold cannabis — an amount that would take 7.8 years for the state to consume if Oregonians continued to purchase legal weed at the same rate as they did in 2018.

New Frontier Data, a leading cannabis data research firm, argues that ending federal prohibition — thus allowing states to import and export cannabis — would stabilize price and demand, and better prevent situations like Oregon’s from occurring.

It is logical, however, that overproduction can and will occur, even on a national scale. Moreover, ending prohibition would allow other global cannabis firms to enter the US market en masse, further diluting the US market.

Then there’s the prevalent black market which has been consistently increasing production and dropping the price of cannabis to remain relevant. As the black market competes for its share of the cannabis sector, margins will become even tighter. 

In a recent report by Statistics Canada, the legal price per gram for recreational marijuana in Canada was nearly 50% higher at $9.70 compared to the illicit market price of $6.51. In Oregon, the legal price per gram has plummeted to under a mere $4, while on the black market weed prices have fallen below $2 per gram.

Contrasting marijuana’s depressing price market is a sense of over-optimism driving the Green Rush. Fueled by a feeling of missing out, many investors are hoping to get in on the ground floor — by unknowingly jumping head first into volatile stocks.

The hype surrounding cannabis investment is dangerous in itself. Vinik argues that because of pot’s low barrier to entry, over optimism will lead to an unprecedented entry rush. As more investors enter the space and the demand for cannabis stagnates, Vinik predicts that the cannabis sector will become a “stagnant-volume, low margin space.” 

Irresponsible reporting from top cannabis analysts projecting overzealous financials is also contributing to the craze. Even conservative projections are enough to fuel irrational behavior from Green Rush investors.

For instance, earlier this week the entire sector was rolling on a high after Cowen analyst Vivien Azer and Piper Jaffray analyst Michael Lavery both issued bullish endorsements on Canopy Growth (NYSE: CGC) and Tilray (NASDAQ: TLRY). Canopy shot up 11.62% by the end of trading Thursday, and Tilray was up 0.88% at $80.40.

To be clear, we aren’t arguing against investing in the cannabis industry, we are however warning buyers to beware — this is a developing industry that will radically evolve over the next few years. Turbulence and volatility are to be expected. Traders should be cautious, do their due diligence, and keep in mind projections are difficult to make — especially given how hard it is for analysts to determine the future activity of a developing industry that has a prolific black market directly competing with it. 

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