Critics are warning that “overly optimistic projections,” coupled with a potential product glut are making valuations skyrocket. Already, Canada’s five largest marijuana companies are valued at over $1.0 billion each, according to Market Watch.
Keep in mind that publicly-traded companies have yet to make a single recreational marijuana sale, yet the nascent market has swelled to more than C$25 billion. The big winners are the early investors who have significant holdings in companies such as Canopy Growth Corp. and Aphria Inc.
“Insiders have created a huge amount of wealth for themselves and even early investors,” PI Financial analyst Jason Zandberg said in a telephone interview with Bloomberg News. “It reminds me of back in the dot-com days. You always heard of a friend of a friend who got in early and got their company bought out.”
The Pot bubble threatens to burst
Last week’s Cover Story in Barrons warns that while marijuana stocks are riding high, investors need to keep their heads on straight.
Marijuana backers have visions of the Canadian pot market rivaling alcoholic beverages and raking in as much as $200 billion in global sales within 15 years. Daniel Pearlstein of Toronto-based Eight Capital told Barrons, “This is a market that is simply way bigger than a lot of people believe.”
However, current sales and cash flow don’t match the sky-high valuations of pot companies, with some trading at over 100 times their total 2017 sales. Barrons says some companies have “market values that are larger than estimated sales for Canada’s entire recreational marijuana market.”
As Market Watch points out, the marijuana bulls have forgotten what happened in Colorado and Washington after the two states legalized recreational marijuana a few years back. Both states saw retail prices plummet after supply caught up with the initial spike in demand.
Actually, legal weed prices in the U.S. fell 20 percent in 2016 and another 16 percent in 2017, according to one price-tracker.
The bottom line? – Licensed pot companies that haven’t made profits during this scale-up period will continue to burn cash and ultimately disappoint their investors.
