Many cannabis companies simply can’t continue on their current paths for much longer.
Investors aren’t all that thrilled with cannabis stocks, and it’s understandable. Despite all the hype around legalization, there simply hasn’t been any substantial progress to have investors believe that significant reform (beyond just rescheduling cannabis as a less dangerous illegal drug) is around the corner. And many marijuana producers are struggling because of the federal ban on pot. Companies can’t transport products across state lines, and even obtaining banking services is a challenge.
But whether legalization takes place or not, there is going to be significant change coming to the marijuana industry one way or another. The losses companies are experiencing and the cash they are burning through simply make the operations of many of them unsustainable. And that could lead to a whole lot more consolidation.
Curaleaf executive expects as few as five “large players” in the industry
Boris Jordan is the executive chairman of Curaleaf (CURLF -2.58%), one of the U.S.’s largest multistate operators. Last year, the cannabis producer generated more than $1.3 billion in revenue. But while the company has more than doubled its top line in a span of three years, its losses have grown at a much faster pace.
He believes there is going to be a whole lot more consolidation coming for the industry due to the current challenges. “In the U.S., we definitely need consolidation because the cost structure is completely out of whack.” Within the next 10 to 15 years, Jordan expects that there will be between five and 10 companies dominating the industry.
I’d argue that there aren’t 10 big cannabis companies in the industry as it is; many generate much less than $1 billion in annual revenue. But over the next decade, there will be a lot more industry growth, and larger companies may emerge as that happens. By 2030 alone, the global cannabis market could be worth more than $444 billion, according to estimates from Fortune Business Insights. That’s more than seven times what it was worth in 2023 ($57 billion).
Why consolidation can be great news for investors
By consolidating, companies can easily expand across the country and reach more customers. And if regulatory issues improve over the years, that can also drastically affect the prospects for profitability for many cannabis companies, making them better investments in the long run.
As of now, the situation is just untenable for many companies. Big names such as Curaleaf, Trulieve Cannabis, Canopy Growth, and Tilray Brands all struggle to stay out of the red.
CURLF Net Income (TTM) data by YCharts.
Consolidation is nothing new for the industry and is by no means a silver bullet for companies. But if there were just a few large cannabis companies dominating the industry and not a whole lot of fragmentation, it could result in better revenue growth, improved efficiency, and healthier margins.
Is now the time to buy pot stocks?
In just the past three years, the AdvisorShares Pure US Cannabis ETF has fallen by an incredible 82% — a clear sign of the bearishness in the cannabis industry. Investors are losing optimism, but in the long run, there could be significant gains to be made from buying shares of top pot stocks like Curaleaf right now. As one of the industry leaders, it could stand to benefit the most from any reform in the future, and it could be in an excellent position to buy out smaller cannabis companies.
Investing in pot stocks isn’t safe by any stretch. But if you’re willing to buy and hold, and hang on for at least five years, it could be an underrated sector to invest in right now. While investors are busy chasing and running up the prices of tech and artificial intelligence stocks, pot stocks have become incredibly undervalued. As long as you go with the bigger, safer names in the industry like Curaleaf, buying pot stocks could set you up for some large returns in the future.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Trulieve Cannabis. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.