Last Updated on February 15, 2021
With a total of 15 states in the United States legalizing cannabis for recreational use and 64 already permitting the drug for medical use, it is easy to see that the market for legal marijuana, and its cannabinoids such as CBD and CBN, will keep growing.
Meanwhile, the 2020 Presidential election has possibly marked a turning point in this regard, as there is voter and growth bipartisan support for legalizing the drug across the nation.
Hemp is already making gains at the federal level by becoming legal in the 2018 Farm Bill and gaining interest from legislators, such as Senator Rand Paul, to allow more delta 8 THC in the hemp category, which would ease restrictions on sales and research. Congress has now moved to push the Marijuana Opportunity Reinvestment and Expungement Act (MORE), a bill that can pave the way for cannabis to have federal-level clearance.
According to business consultant Jasdeep Singh from CT, who is also Head of Operations and Marketing for 3BC (a hemp-based cannabinoid company), investors should not ignore the tectonic shift that is going on in the cannabis market right now. Companies have begun going public and as political support keeps growing, the industry will only expand its operations, markets, reach, and revenues.
The stock market seems excited about the future of cannabis
Since 2021 started, the North American Marijuana Index, a benchmark that tracks a total of 41 stocks of hemp businesses within the United States and Canada, has yielded a 22% return for investors. It also delivered a solid 70% gain last year after the strong rebound of its March post-pandemic lows.
Meanwhile, according to data from CannabisMarketCap.io, the total market capitalization of the top 100 marijuana stocks globally is close to reaching $100 billion. That market cap would represent a little less than a third of the $344 billion global market for hemp, according to the latest research from New Frontier Data, which includes both licit and illicit usage across the world.
The report from the research firm highlights that there are approximately 260 million active cannabis consumers in the world. About 50 countries are moving to legalize the drug, mainly for medicinal use, while another 6 have already extended legal permission to use it for recreational purposes.
According to the research firm, North America and Europe, two of the most important legal marijuana markets in the world, have a combined value of $154.1 billion. This represents 1.5 times the market capitalization of the top 100 hemp stocks, a fairly conservative ratio from an investment standpoint.
In this regard, Dr. Singh from Connecticut, US believes that, ultimately, the world will keep favoring the legalization of the drug for three reasons. One, studies increasingly show specific health benefits from the whole plant and its cannabinoids. Two is the potential government revenue that can be collected from a taxable legal cannabis market. Lastly is that research has shown that the legalization of marijuana may lead to a reduction in drug-related crime.
Yes, it could be a while until legalization happens, but the upside is too evident for politicians to ignore for long. The valuation of the top 100 companies could land at $600 billion if sales were to hit the $150 billion thresholds five or ten years from now.
The MORE Act unlocks interesting opportunities in the US market
Under the MORE Act, Congress would move to “decriminalize and deschedule cannabis” by removing the drug from the Controlled Substances Act enacted in 1970. This would effectively allow marijuana to be commercialized for recreational purposes across the United States.
Based on the estimates from New Frontier Data, this move would unlock $90 billion in demand for legal marijuana businesses in the United States, with roughly 65 million active consumers now having access to the drug within the boundaries of what the law permits.
As of now, the top 20 marijuana companies within the United States have a market capitalization of around $40 billion, which means that they are trading at around 0.4 times their potential sales if this law were to be passed. Although the figure cannot be fully relied on for the purpose of investing, the numbers seem to back the thesis that the market is not fully pricing the impact that this regulation will have on the financial performance of these businesses.
The cannabis market is moving towards the end of its first cycle of multi-billion-dollar ventures and IPOs. These are strong indicators of a market poised to expand rapidly with no legislative change and exponentially with more legal freedom.
Based on the estimates discussed above and the prospect of full-blown federal legalization of cannabis in the United States, the current valuation of marijuana stocks appears to be conservative, which gives investors a temporary opportunity to get in early before the sector starts to mature.