Business as Usual: The Cannabis Bubble

Richard Favlo, Maroon-News Staff

The “Cannabis Bubble” has popped, though it seems to have flown under the radar for some time now. In other words, the dismal performance and financial hemorrhaging currently ongoing within the marijuana market sector has not generated the amount of media attention as other asset bubble bursts have, such as the “Bitcoin Bubble” in 2017. This burst of the cannabis bubble can be seen as a result of  speculative investors bidding money-losing cannabis firms to extraordinary price levels, only to see nearly all profits disappear.

Toward the end of 2016, investors—along with the general public—became increasingly fixated on the idea of marijuana legalization, both on a federal and state level. At the time, more states had begun to follow in the footsteps of Colorado and Washington by legalizing the drug on at least some level. After an uneventful 2015, eight states voted in 2016 to move forward with legalization, either on a recreational or medical level. Then, the bubble formed.

As states across the United States enacted less strict policies regarding cannabis use, businesses were in a race to acquire the largest piece of market share before the industry became overly saturated. Ironically, oversaturation was one of the leading contributors to the collapse of the cannabis sector, as the field became too crowded, too quickly. Due to this desire, many cannabis companies began trading on stock exchanges, thus presenting ordinary investors with an opportunity to take a position. Due to the large number of firms that filed Initial Public Offerings (IPOs) at the same time, I will focus on three specific firms. These firms are: Canopy Growth Corporation (CGC), Tilray (TLRY), and Aurora Cannabis Inc. (ACB).

In May 2016, CGC was trading around the 2 USD price level. By September 2018, the stock had ripped up to 51.53 USD, an increase of roughly 2,500 percent in just over two years time. Similarly, TLRY experienced a massive spike in its price. After listing on the NASDAQ in July 2018, the stock was trading just shy of 30 USD. By October 2018, just three months later, TLRY was trading at 148.30 USD, or an increase of about 400 percent. Finally, ACB was trading around the .40 USD range throughout the early stages of 2016. By January 2018, the stock reached an all-time high of 10.69 USD, representing an increase of 2,573 percent, similar to the percentage gain of CGC.

Unfortunately, for investors who bought shares at the all-time highs, they had purchased at the peak of the “Cannabis Bubble.” Within a short amount of time, the aforementioned marijuana companies would experience dramatic depreciations in price and Return on Investment. CGC now trades at 15.28 USD, a 70 percent decline from its high in September 2018; TLRY now trades at 10.02 USD, or 93 percent below its October 2018 peak; ACB now trades at 1.17 USD, 89 percent below its peak reached in January 2018.

The cause of the bubble can be attributed to the overly optimistic public sentiment surrounding the marijuana industry. As more states began legalizing the drug, more companies began to venture into the field. This led investors to develop the impression that every single cannabis company that entered the race would benefit from relaxed regulations on the industry. This caused a large herd to form around the space, leading to unjustifiable rises in stock prices for companies that were not worth anywhere close to the valulatons being ascribed to them. Take, for instance, Canopy Growth Corporation. In April 2019, the market capitalization (a metric used to determine what investors deem a company to be worth) of CGC was about 18 billion USD. At the same time, CGC had -250 million USD of net income, meaning high costs were preventing profitability. To this day, CGC, like many other cannabis companies, has yet to turn an annual profit.

As the revelation regarding the lack of profitability of the vast majority of cannabis companies came to fruition, investors were quick to pull money out of the market, leading to rapid declines in prices. As a result, the “Cannabis Bubble” burst, leaving many companies desperate for funding and any glimpse of hope for future business prospects. This particular bubble was certainly not the first asset bubble to occur, and it surely will not be the last.