Cannabis stocks have been one of the strongest industries since the January 6 Georgia runoff elections which gave Democrats a majority in the Senate by the slimmest margin. The election outcome has had such an outsized impact on the industry, since cannabis legalization or decriminalization has such broad popular support. However, any reform would be blocked by Senate Republicans who wouldn't allow a vote on such an issue.
As a result, the ETFMG Alternative Harvest ETF
Is this a Bubble?
Naturally, such performance has set off alarm bells that this is another bubble. There's certainly some evidence to support this thesis. Most of these companies are years away from making any money. Further, by all indications, cannabis is just another commodity that is cheap to produce. Already, there are reports of oversupply in certain states. It's also likely that with legalization, companies with bigger pockets and resources may enter the market who would be willing to endure losses to build market share.
The bulls argue that cannabis is in the early stages of displacing alcohol and tobacco as acceptable forms of recreating. They believe that the industry is in the early stages of making products that appeal to consumers. Additionally, it's only a matter of before it's fully legal across all 50 states. Younger lawmakers on both sides of the aisle tend to be supportive of legalization. And, voters on both sides of the aisle are also supportive. The cannabis industry in the US is currently estimated to be worth $20 billion, but grow to a $100 billion value by 2026.
What's Next
The latest catalyst for cannabis was new Senate Majority Leader Chuck Schumer saying that he intends to co-draft legislation to legalize marijuana in the U.S. Another positive news for the industry is the beginning of consolidation as Aphria and Tilray announced a merger to create the largest cannabis producer. This combined entity will benefit from lower unit costs that should boost margins.
Another positive development is that some cannabis stocks are turning the corner to become profitable, while others are projecting profitability over the next couple of years. This is a sign that the industry is maturing, and real businesses are forming. In contrast, the previous marijuana bull markets in 2014 and 2017 ended with cannabis stocks collapsing as it was clear that companies were far away from profitability amid doubts about the viability of their business models.
