Big Canadian cannabis companies have overestimated their forecasts for the next couple of years. However, companies that look for investment opportunities abroad, such as World High Life PLC (NEX: LIFE), have great potential
It has been a year since cannabis was approved for private use in Canada. In the meantime, the stock market has been doing well, but now sceptical voices are being raised.
Since October 2018, Canadians have been able to buy around 30 grams of cannabis and carry it with them for private consumption. When the popular drug was legalized a year ago, the hype surrounding the hemp plant was huge but according to one analyst, this hype seems to be over for now.
Cannabis stocks with low market potential
John Zamparo of the Canadian Imperial Bank of Commerce (CIBC) expressed scepticism about the Canadian cannabis market in a statement a couple of weeks ago. The forecasts for turnover and adjusted profits of the companies for the next two years are not achievable. For the coming year, the industry expert expects a turnover of 2.2 billion Canadian dollars compared to a forecast of seven billion. While the estimates for 2021 are 7.5 billion Canadian dollars, Zamparo sees a turnover of 3.3 billion.
The analyst is also reluctant to invest in Ebitda, with estimates of 550 million Canadian dollars in 2020 and 975 million Canadian dollars in 2021 compared to market estimates of 900 million and 1.6 billion Canadian dollars respectively. In his statement, Zamparo makes it clear that the estimates refer only to the Canadian market. In addition, the market would be affected by the underperformance of smaller players.
Fluctuating cannabis market
In fact, cannabis stocks have not shown any impressive developments in recent months. Industry representatives such as Aurora Cannabis, Canopy Growth and Cronos, which were among the most hyped stocks in the segment at the beginning of the year, have since lost more than half their value. How should investors behave now? Not all industry experts share Zamparo’s opinion. Some even say the popular drug has great potential for the future.
On the one hand due to the steadily increasing legalization tendencies worldwide – among others in the USA, where one of the markets with the greatest growth potential is located. On the other hand, it is the large variety of products that can be produced with cannabis. In addition to private consumption, the medical and cosmetics industries are also becoming increasingly interesting.
Companies investing in the US and Europe
It is for these reasons that some Canadian companies are looking at the US cannabis market for expansion opportunities. GreenStar Biosciences Corp. (CSE: GSTR) has built their business strategy around creating a diverse portfolio of top cannabis companies in North America. One of their first successful investments was a partnership with Cowlitz, a Washington state-based producer of high quality cannabis products at a low cost. Cowlitz experienced a significant growth, recording a revenue of $14.6 million in 2018, in just five years of operations, thanks to GreenStar’s support.
GreenStar has also another investment set to be a hit. Capri, their joint venture with Progressive Herbs Inc. is the only owner of the licence for their new, patent-pending cultivation technology. This technology makes cannabis plant harvesting more efficient and cheaper while maintaining high product quality and high THC level. According to the tests, while producers are usually able to collect three to four harvests a year, with Capri’s technology they would be able to produce up to five harvests in a year.
Companies are looking for investment opportunities not only in North America, but also in Europe, which is expected to be a market of 58 billion euro by 2029. World High Life PLC (NEX: LIFE) has recently started taking action on their expansion plans by proposing a deal to Love Hemp Ltd, to acquire all their shares for 9 million GBP. The UK’s leading CBD company has their products available in over 1200 individual stores and network stores such as Boots, Sainsbury’s, Superdrug and Tesco, and is planning to enter other European markets, starting with Germany in 2020. This deal will be beneficial for both companies, and is just a first step for World High Life in their strategy to acquire other promising cannabis competitors in Europe.
Nevertheless, one should not forget that the cannabis market is not for the faint hearted. Walter Vorhauser, expert at Oddo Seydler-Bank, compared the industry with the beginnings of biotechnology, which is also characterized by high volatility. Nevertheless, the market has a high potential: The increasing legalisation is advancing research, cultivation, processing and distribution and has led to many start-ups in the sector.