Legal Cannabis Industry: CO Case Study

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Legal Cannabis Industry: CO Case Study

It’s been a tough year for investors in marijuana stocks, but you wouldn’t know it from looking at the most mature legal cannabis market in the US. Colorado dispensaries are still collectively posting record marijuana sales figures even though this is the most mature market in the US. Legal sales started back in January 2014.

It was then that, we started conducting quarterly dispensary surveys to understand how this new industry was developing in Colorado and have followed its progress ever since. Given this state’s population, healthy tourist trade and longest track record selling retail marijuana, we see it as a useful proxy for the underlying health of the industry. With that, let’s dig into some fundamentals of how the underlying business has been performing over +5 years in Colorado relative to store and tax revenues:

#1) Retail marijuana sales:

  • Reached a record $1.21 billion in 2018 according to the state Department of Revenue. It first crossed the annual $1 billion threshold in 2017 at $1.09 billion.
  • This year should post a new all-time high as well, with retail sales already totaling $930.6 million as of this past August (latest available data).
  • Recreational marijuana sales posted a monthly record of $141.9 million in August 2019, up 26% y/y.
  • The prior two records were $122.4 million and $135.9 million in June and July 2019 respectively. Sales tend to do best over the summer months with stronger tourism helping. Sales also pick up on the weekends, so this past August benefited from including 5 Fridays and Saturdays.

#2) Total retail and medical marijuana sales:

  • Registered a record $1.55 billion in 2018, which should also be surpassed this year.
  • There was $1.16 billion in total sales from January through August 2019, and there were four straight months of record monthly sales in May through August. The record monthly high was $173.2 million in total sales in August.
  • Medical marijuana makes up a much smaller portion of total sales than recreational marijuana. For example, at $31.4 million, medical marijuana made up 18% of total sales in August 2019.
  • To put this in perspective, there was $32.5 million in medical sales during the first month that dispensaries sold recreational marijuana in January 2014. While medical marijuana sales were down 4% in August 2019 versus January 2014, recreational marijuana sales were up 912% when comparing the first to the latest month of retail cannabis sales.

#3) Revenue from taxes, licenses and fees:

  • Totaled $266.5 million in Colorado during 2018, up 8% y/y.
  • This year’s figure should post a new high as it has totaled $223.3 million through September (latest available data).
  • Most revenue comes from the 15% excise tax and 15% sales tax on retail marijuana.

As for what this all means for public equity investors in marijuana stocks, three points:

#1: Recreational marijuana sales continue to grow strongly in Colorado, still beating records despite the market now being +5 years old. That the US state selling retail marijuana the longest continues to perform robustly shows why there was so much initial investor enthusiasm in the industry. The problem is that they got ahead of themselves, not fully appreciating all the regulatory challenges between patchwork state frameworks and slower than anticipated legalization on a state by state basis.

Bottom line: the underlying legal marijuana business is solid. That said, investors overhyped cannabis stocks and are now starting to understand the hurdles these public marijuana companies are facing when trying to grow amid choppy and onerous regulations.

#2: Even Canada shows the marijuana industry’s complexities despite October 17th marking the one year-anniversary for nationally legal marijuana there. The first year was plagued with slow store rollouts, trouble competing with the black market, supply shortages, varying regulations across provinces and restrictions on the types of products that could be sold. For example, stores were not allowed to sell higher margin products beyond flower, such as edibles, extracts and topicals during the first year of legalization. Now, regulatory agency Health Canada has already warned that only a limited supply will first make it onto shelves no earlier than mid-December.

The upshot: Canada is another example that even with national legalization, the marijuana industry presents a tough market to scale in amid a difficult regulatory environment.

#3: The 2020 US presidential election will likely be the next big catalyst for public marijuana stocks. A big win for Democrats in the White House and Congress should help to revitalize these names on the prospect of faster US national legalization. Successful state ballot initiatives could also help in liberal states like New York and New Jersey which haven’t been able to legalize the drug through their state legislatures. Colorado’s growing state tax revenue base from legal marijuana sales is incentive enough for federal or more state legalization as it offers a new lucrative source of income. Ultimately, national legalization is key to hopefully standardize the industry in the future to make it easier for companies to scale and navigate.

In sum, despite many headaches to work through we are still bullish on the long-term prospects of the legal marijuana industry. Colorado serves as a successful example of how marijuana markets across the US could thrive.

Sources: https://www.colorado.gov/pacific/revenue/colorado-marijuana-tax-data

https://www.colorado.gov/pacific/revenue/colorado-marijuana-sales-reports

https://ohsonline.com/articles/2019/06/21/health-canada-cannabis-edibles.aspx