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Cannabis Investment Outlook for 2021

Cannabis Investment Outlook for 2021

Last year was a wild ride in the cannabis world as investors got spooked—but the outlook going forward is looking up!

The 2020 flight began because investors were frightened off by less-than-spectacular returns on Canadian cannabis investment outlook investments at the one-year anniversary of federal legalization in Canada. That made it harder for US companies to expand and invest in new employees. What little money was available all but vanished in late March 2020, with the arrival of the global pandemic.

The effects of COVID-19 reduced both the need for and availability of paid employees. The pandemic ultimately drove increased sales industrywide. But social distancing, occupancy limits, and shelter-in-place orders limited the ability for staff members to occupy a public retail space and work closely together.

In some cases, a reverse dynamic came into play. Some booming businesses reported staffing shortages as employees fought off the virus, quarantined due to contact tracing, or were forced to stay at home due to underlying medical conditions. One business owner reported more staff turnover in 2020 due to the pandemic than in the previous five years.

However, expectations are high for 2021 and beyond!

Leading industry researcher New Frontier Data has just updated its prediction for the years to come, and it’s quite impressive. They originally predicted that the U.S. cannabis market would grow to $38.3 billion by 2025. That has just been raised to an estimated $41.5 billion of legal cannabis sales in 27 states (with California, Illinois, Florida, Michigan and Colorado topping the list).

In terms of projected compound annual growth rate (CAGR), it’s seen as 21% for the total market. That breaks down into a 19% CAGR for the medical cannabis marketplace, and a 23% CAGR for the recreational cannabis marketplace. Sparking this trend will be new states making the transition to legal cannabis and increasing public consumption as the health, wellness and therapeutic benefits of cannabis become more widely accepted.

cannabis investmentAccess to Capital Should Continue to Expand

As we entered 2020, limited access to capital was top of mind following the vaping crisis in late 2019, an obstacle to growth that was compounded by the pandemic initially. Sale- leasebacks were one of the important sources of funds for expansion during 2020 and now, debt capital is starting to become more available. Several MSOs sold equity late in the year and the markets handled the supply well.

We expect 2021 to see debt terms improve and the appetite for equity to expand. Additionally, several SPACs (Special Purpose Acquisition Company) targeting the cannabis sector could deploy capital.

New Public Companies Are Going to List

After a long drought, companies began going public again, with a successful IPO from Hydrofarm late in the year signaling investor demand for new names. New Cannabis Ventures maintains a list of pending new issues. The Parent Company and WeedMaps, both of which are going public via transactions with SPACs, are on track to begin trading in Q1, and Verano Holdings will be listing on the CSE after completing a reverse merger.

Over 4 years after the first cannabis REIT debuted, AFC Gamma, a mortgage REIT, is conducting a NASDAQ IPO. Private MSO Ascend Wellness has been rumored to be pursuing going public as well. We anticipate that there will be several more new listings in the year ahead from companies that are generating substantial revenue and profits. 

More Investors Will Embrace the Sector and Make Funds From a Wider Variety of Sources More Readily Available

One of the highlights of the sector this year was the beginning of institutional investment, which we discussed investorsrecently. We have seen well known funds begin to take equity stakes in several of the leading MSOs, and many investors are providing debt capital. These investors aren’t waiting for higher exchange listings, and it’s encouraging to see compliance departments become more comfortable with the sector.

A big challenge for retail investors has been their inability to access cannabis investments due to their listing status. In the past, Canadian LPs and just a few American ancillary companies were the only stocks trading on higher exchanges. We are beginning to see not only more ancillary stocks but also a clever ETF that trades on NYSE ARCA that could dramatically expand access indirectly to American cannabis companies.

State-Legal Cannabis Should Continue to Gain Share From the Illicit Market

Medical cannabis being deemed an essential service was a game-changer for the industry last year, as it allowed the legal market to better compete with the illicit market. In addition to delivery and/or curbside pickup introductions into markets where they didn’t previously exist, progress was made on the payments front, all of which allowed effective e-commerce solutions to proliferate. This helped the legal market greatly improve the customer experience relative to the illicit market.

Strong growth in the most mature markets, like Oregon and Colorado, compared to a year ago provided evidence of progress towards conversion to the legal market. We expect continued advancement on this front in 2021. Not only are there several new markets opening, but some states, especially California, have seen many localities that had previously not permitted retail stores reverse course. The thirst for tax revenue and economic development are tailwinds for the legal cannabis industry.

Additional States Could Legalize

Part of the reason cannabis stocks surged in Q4 was the resounding success at the ballot box in November, with voters in Arizona, Montana, New Jersey and South Dakota all approving adult-use and voters in Mississippi opting for medical cannabis.  Arizona and New Jersey are particularly exciting for investors given the large presence of publicly traded MSOs, but the even bigger benefit will be a likely wave of legalization on the East Coast though the legislative process.

Since November, the governors of Maryland, New York, Pennsylvania, Rhode Island and Virginia have voiced support for legalization. Beyond the East Coast, New Mexico and Wisconsin are considering legalization.

Political Outlook

While it is widely believed that cannabis will be legalized at the federal level under the Biden administration, creating more jobs, generating more taxes, and becoming more attractive to investors, the reality of competing legislative priorities and limited scientific data will likely mean it will not happen in the immediate future.

 

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Posted by Canna Business Team


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