It’s not just heat lamps in closets and nickel bags anymore: Marijuana is getting some respect as legal sales take off.
This week two marijuana analysis and investment firms released a summary of a report that appeared to confirm that the industry has become a gold rush. National legal sales of cannabis grew to $5.4 billion in 2015, up from $4.6 billion in 2014, according to the firms, the ArcView Group, based in San Francisco, and New Frontier, based in Washington.
Demand is expected to remain strong this year, with a forecast of $6.7 billion in legal sales, the report said.
The promises and headwinds of the industry are potentially far-reaching and attracting notice on Wall Street. As more states legalize marijuana sales, analysts are weighing the stock market benefits of new businesses as cannabis goes corporate. Funds are considering the ethics of investing in marijuana. Parents are even debating whether to allow their children to buy the stocks.
And say goodbye to the common resealable bags and heat lamps in the closet. Lucrative legal side businesses are spinning off, like the climate systems for growers built by a company in Boulder, Colo., and the FunkSac odor-proof and child-resistant marijuana bags produced in Denver.
“There is still a certain stigma around it,” said Brandy Keen, a co-founder of Surna, which makes technology for indoor cultivation. “This is an industry that came out of the basement. It grew out of closets and basements and hidden facilities in cinder-block buildings.”
Nonmedicinal adult use accounted for $998 million of the total sales in 2015, up from $351 million in 2014, according to the ArcView/New Frontier report summary. The estimates are based partly on state tax receipts and data on medical and recreational sales.
The report summary said that by 2020, legal market sales were forecast to be $21.8 billion.
The summary, released before a full report scheduled for the end of February, was one of the latest by market analysts to scrutinize the emerging marijuana industry. Merrill Lynch said in a report cited by Philly.com in December that it expected the cannabis market and associated testing technologies to grow if legalized.
GreenWave Advisors said in its latest annual report in November that it estimated revenues of $4.8 billion in 2015, compared with about $3.2 billion in 2014. It expects further growth in 2016 and a “surge” in 2017 and 2018.
The latest report defined three types of legal marijuana use: adult recreational use; medical use of cannabis; and medicinal use of a cannabis product from which the compound that gets a consumer high has been extracted. It said 2016 would be the “tipping point” at which a majority of states transition from cannabis prohibition to some form of regulated legal market.
John Kagia, New Frontier’s director of industry analytics, said he has spoken at investment meetings about legal marijuana where it was “standing room only” with investors trying to “figure out angles” given the regulatory climate.
Four states and the District of Columbia allow full adult use, and this year, seven more will vote on allowing it: California, Nevada, Arizona, Massachusetts, Maine, Rhode Island and Vermont.
Twenty-three states already permit medical cannabis use, and four others — Florida, Ohio, Missouri and Pennsylvania — are positioned to advance medical laws, the report said.
Some federal regulatory barriers are easing, and federal interest in research into medical marijuana use is growing. But there are headwinds, the report cautioned. Cannabis businesses face a higher tax burden. They are also unable to use banks because of federal laws, which can hinder efficiency and pose security risks, forcing the businesses to invest heavily in security measures. Increased competition across state lines could pose new challenges as more states legalize the trade.
Marijuana stocks underperformed on the market in 2015 compared with the Nasdaq and Standard & Poor’s indexes, tempering some of the enthusiasm of investors, the report said. Legalization is also a hot topic of national debate, making the industry vulnerable in an election year.
“Though public opinion is shifting toward embracing cannabis reform, presidential candidates are more reticent to support legalization,” the report said. The plant’s business potential has deep and roots, as the rapper Snoop Dogg, the country singer Willie Nelson and the actor Tommy Chong have demonstrated by leveraging their celebrity status to establish new brands in the market, the report noted.Read More