Cannabis Investors Spooked by Slowing Growth Are Ignoring the Long View
America has botched the easiest “no brainer” in history: legalizing cannabis. But with the help of regulators, the industry can recover
By Tom Adams and Maya Jasmin
2022 was a brutal year for US cannabis companies. The leading public stocks lost 66% of their value. New Cannabis Ventures’ American Cannabis Operator Index ended the year at 14.25, 88% below its all-time high of 118.22 set a seeming lifetime ago on 4/1/19, just after the top multi-state operators (MSOs) went public in 2018.
A good part of the damage on Wall St. was caused by Washington, which dangled the hope of federal regulatory reform but didn’t deliver it. But there was plenty of pain on Main St. too: In a September 2022 forecast update, BDSA revised downward its forecast for 2022 US industry growth to just 7.8% in 2022. That sounds healthy, but in the eight years since Washington and Colorado became the first states to legalize adult use in January 2014, what we estimate was a modest $2.5-billion medical-only legal market in 2013 exploded by 10x to what BDSA estimates was $25.1 billion in medical and adult-use spending in 2021. That remarkable run at a 33% compound annual growth rate (CAGR) was bound to come to an end. But it turns out the COVID bump the industry enjoyed in 2020 and 2021 merely postponed the slowdown and telescoped it all into 2022.
But a Global Go Analytics deep dive into the growing wealth of publicly available data on the business suggests there is little threat that legal cannabis is suddenly going to become just another consumer-packaged goods market, struggling every year just to top the inflation rate by a point or two of growth. The industry’s fundamental investment thesis remains intact. In fact, it’s stronger than it’s ever been now the hot air has been let out of the balloon that allowed the MSOs to go public at what, in retrospect, were unsustainable valuations (see “By The Numbers’ in the Winter 2022 edition of Global Cannabis Times for a look at MSO valuation metrics).
Why Invest in Legal Cannabis?
The investment thesis starts with the simple fact that tens of millions of Americans were spending about $50 billion on cannabis from illicit sources before adult-use legalization began in 2014. Most new industries (think organic foods in the ‘70s, personal computers in the ‘80s, or the internet in the ‘90s) spend years educating consumers on why they would want their products. Consumers knew just what to do with legal cannabis from day one of legalization.
That largely explains both the industry’s eight years at a 33% CAGR, and the sudden deceleration of growth in 2022. For investors and strategic planners, it’s important to understand the typical pattern we’ve now seen in almost a dozen states:
Medical-only era: generally slow growth over many years to a couple hundred million in spending; only California, Florida, and Pennsylvania (and potentially Oklahoma in 2022) have broken $1 billion as medical-only states.
Early adult-use era: Expanding the consumer base from a US average of less than 1% of the population with medical cards to the 10%-plus that report consuming monthly in government surveys has the effect you would expect: early-year CAGRs have typically been stratospheric. Witness both pioneering Washington and recently legalizing Massachusetts: spending nearly doubled in each of their first three years of combined medical/adult sales (2014-2016 and 2019-2021, respectively).
Mature adult-use era: Competition – legal, illicit, and from neighboring states – drives down prices enough that spending growth slows dramatically or even goes into reverse (see table).
These early-year CAGRs vary based on many factors that should be taken into account in planning for future adult-use transitions: 1) How liberal were regulations in the existing medical market (practically non-existent in California, which created a booming medical market that actually contracted in 2018, the first year of adult-use sales); 2) How restrictive were adult-use regulations (in California, local bans cut the store count by 90% initially and have slowed growth ever since); 3) Did regulators continue to license new operators (not so much in Illinois). Of note: high taxes are not necessarily fatal in the early years of consumer excitement (Washington launched with a 39% excise tax), though they become a drag on legal operators once the illicit market recovers its footing.
There are also state specific reasons behind some of the huge variances in the sobering 2022 trends. Michigan has taken a relatively liberal approach to retail availability and continues to expand (as does medical-only Florida which also posted solid 2022 growth). Illinois’ long hiatus on new licenses will end in 2023 but put a crimp on 2022 growth, as did the much lower prices available less than an hour from Chicago in Michigan. California’s $8-billion illicit market is weathering the modest challenge mounted to its hegemony by over-taxed and over-regulated legal operators and is now actually shrinking the local market, and likely having a negative impact on neighboring Nevada’s tourism-dependent legal trade.
The Future of Cannabis Investing: New States, New Consumers, New Products
The road back to double-digit growth rates in US legal cannabis is three lanes wide:
New States: When the annus horribilis of 2022 began just 41% of monthly consumers – about 25 million adults – had access to legal cannabis (and about 40% of those were in California and mostly buying in the illicit market). But that number is on track to hit 16 million by the end of 2023 just from new adult-use markets now rolling out stores.
New Consumers: The percentage of American adults admitting to federal survey takers that they had consumed cannabis in the past month jumped by 3.5 percentage points to 9.5% from 2013 to 2020 in the SAMHSA survey. Other surveys in legal states suggest that trend accelerates with legalization, and Global Go Analytics forecasts that adult US consumers could number 35.2 million by 2027.
New Products: Just as importantly, the number of occasional users also grows substantially in legal states, largely driven by a huge proliferation of form factors, brand marketing and attractive retail environments that the legal market is creating.
BDSA forecasts a re-acceleration of nationwide growth rates to an 11% CAGR through 2026, albeit with some significant caveats: If the country’s largest market California can resume growth in 2024 after declining in both 2022 and 2023; if the four big northeastern states (Massachusetts, New York, New Jersey and Pennsylvania) can more than double in size to $8.8 billion in five years; if the third-largest state in the union, Florida, legalizes adult use in 2025.
But even that acceleration could prove conservative if regulators get on board for eliminating the illicit market (and mirabile dictu, California canceled its misguided $161/pound cultivation levy in July, now that that levy works out to a 32% tax on $500 pounds). The math for investors – and the logic for regulators – is simple: Of America’s 24.6 million monthly using adults, only 10.1 million had access to legal cannabis at the beginning of 2022. There will be 35.2 million adult consumers by 2027. Where should they get their cannabis: from unregulated street dealers selling untested weed, or from regulated retail stores and delivery services selling a cornucopia of tested and reasonably priced (and taxed) CPG products?
Tom Adams is the founder and CEO of Global Go Analytics, where he provides strategic planning services to top companies, entrepreneurs and leading investors in legal cannabis. He can be reached at [email protected]
Maya Jasmin is Director of Insights & Analytics at Global Go Analytics. She was a Senior Analyst then Director of Research at BDSA from 2016 to 2021, following 15 years of research, analysis and consulting in the consumer electronics industry.
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