Pros and Cons of Investing in Cannabis

Stephen Andrews
24 Aug 2022

Is investing in cannabis companies a smart choice or not? This is a beguiling question for many investors. There's a reason why people refer to the legal marijuana sector as the "green rush." The forecast for the industry in the next couple of years is massive growth. In the U.S. alone, sales of legal cannabis goods are expected to surpass at least $57 billion by 2030. That's the number without including the states that haven't activated a legal market thus far. However, as with any other industry, investing in cannabis can be tricky and comes with a specific set of risks and challenges.

Whether it's individual stocks or cannabis ETFs, investors in the legal marijuana industry have ample opportunities at hand. At the same time, investments remain somewhat risky and volatile, primarily because marijuana still remains banned as per federal law. 

Why Should You Invest in Legal Cannabis?

Early birds reap the rewards. There's currently a growing acceptance of cannabis in the U.S. and all over the world. The global market size for the cannabis industry will surpass $100 billion by the end of the decade. Those who invest now are planting the seeds for the future of an emerging sector. As the industry grows and develops, as more countries introduce legal markets, early birds may profit from significant investment returns. 

Various ways to gain exposure. Investors can enter the medical sector or the recreational one. Just hemp or the whole menu? Then, there are plenty of other choices, such as investing in farms and growers, dispensaries and retailers, ancillary companies, pharmaceutical companies, as well as businesses that develop different technologies that support the marijuana industry as a whole, such as lawn and garden care products, nutrients, hydroponics, etc. 

The revenue numbers are outstanding. As more companies join public listings, the sector boosts its affluence and wealth. Wherever you look, companies report profits going up quarter after quarter. Even when a severe crisis hits the world. For example, Green Thumb Industries, one of the most successful performers in the U.S., reported a net revenue increase of 167.5% year over year in 2021, as if the pandemic didn't happen. 

Demand for products is high. The fact that cannabis companies report compelling revenue numbers indicates that there's robust consumer demand for sure. Looking at individual state markets where both recreational and medical marijuana is legal is also an eye-opener to the sheer scale of the industry. The legal Californian market is worth over $4 billion, Colorado $2 billion, and third is Michigan with over $1.2 billion. Florida and Oklahoma are currently the two most rapidly growing markets.

investing in cannabis, smart or not?

What Are the Risks of Investing in the Cannabis Sector? 

A young market is often difficult to predict. While investors can quickly harvest fortunes in the nascent sector, there are the risks of unpredictability and volatility, the unsurprising traits of every emerging industry to be fair. Sometimes it's just hard to tell how stock markets will perform. Uptrends are exciting, but downtrends are just as important to watch and follow. 

The legal obstacle is always looming. While many states in the U.S. have rejected the harmful federal ban on marijuana, many investors still have reserves to put their money in the sector precisely out of fears of potential legal complications or even federal persecution because of the prohibition. The legal obstacle is probably the most considerable risk to take when entering the sector. Even in "perfectly" legal states such as California, Colorado, or Oregon. 

The delay of legalization has an impact on stocks. Enforcing the federal legalization of cannabis is now a prominent political question. Hopes were high when President Biden began his term in office, but legalization so far didn't happen. Overall, lifting the federal prohibition on marijuana has been debated for a painfully long time, but nothing ever happens really. An analysis published by the Financial Times at the beginning of this year shows that delay now directly affects how stocks perform. Between January 2021 and January 2022, the average US-listed cannabis stock went down by more than a third. 

Looking Ahead

All summed up, there are plenty of reasons why investing in the cannabis industry can be a brilliant idea. High potential, lots of versatility where to invest, outstanding revenues, and robust demand are promising traits of an industry looking forward. And as with any industry, some specific risks will always prevail. 

In such an ambiguous economic environment, doing the research before making the choices is probably the best investor mantra to follow. Which company can pivot? Which company can adapt and even thrive in times of uncertainty or crisis? What kind of company fits my profile as an investor? Finding the right choice may take some time, but as with other investments, hopefully, in the end, it pays off. 

Stephen Andrews