The cannabis industry has proven itself successful as it skyrockets in the past few years. There are many factors as to why it was able to attain the prominence it achieved, from public support and advocacy groups’ efforts to the plant’s long history. Marijuana has been popular among cultural, underground, and counter-culture groups, and it is now more accepted and consumed in more mainstream circles, especially with legalizations in various countries, including some parts of the United States.
The success of the cannabis industry is measured in the level of social and scientific developments it was able to achieve. However, there is one indicator that offers more quantitative evidence of the sector’s success: stock value. This is the calculation of the projected value of a company’s stocks. This is used by investors, especially venture capital investors, to determine whether the stocks are good investments.
The State of Cannabis Stocks
In the marijuana industry, companies have experienced their fair share of ups and downs when it comes to stocks. Back in 2018, has a market size of $10.6 billion. In 2019, the sector was projected to obtain an economic impact of up to $16 billion, after investors funneled a whopping $10 billion into North America’s marijuana industry and this is only in the formal industry. A 2016 study revealed that around 87% of marijuana sales occurred in the black market.
Despite the existence of the black market, the formal market remains to be highly successful, especially in the past year when the industry boomed. However, experts expected a dip in marijuana stocks by early 2020. In fact, a Forbes report said the sector saw a drop in its stock prices after years of soaring valuations.
According to the report, incidents of vaping risks is a huge contributor to this negative development. This is combined with the emergence of counterfeit products and the lack of certainty for the Secure and Fair Enforcement (SAFE) Banking Act, which could allow cannabis companies to bank without implications to the financial institution.
While the market started slowly at the beginning of 2020, things have started to look up towards the middle of the year, especially as the market saw an increase during mid-March. While, figures are low compared to year-to-date ones, several companies have seen significant bounces. According to the New Cannabis Ventures Global Cannabis Stock Index cited by another Forbes report, it has improved by more than 97% since mid-March.
The Forbes article also revealed that seven American marijuana stocks have improved this year namely Akerna, Green Thumb Industries (GTI), Greenlane Holdings, GrowGeneration, Innovative Industrial Properties, TerrAscend, and Trulieve. These companies saw an increase in revenues, with GTI having the largest year-to-date increase of 268% in the first quarter in 2020 compared to the first quarter in 2019. Per stock valuation, the best marijuana stocks for June 2020 are Village Farms International Inc., Amyris Inc., and Aphria Inc.
Beyond 2020, experts remain optimistic that the sector will remain strong. Fortune Business Insights project that the cannabis market size will be worth $97.35 billion by 2026. This shows a compound annual growth rate of 32.92%. If these projections prove correct, the industry may be able to expect stronger stocks.
The Relationship of Cannabis Stocks and VC Funding
Now let us go to venture capital (VC) funding in the cannabis industry. Venture capital funds are investment pools composed of money from investors who are looking to find private equity stakes from start-up and small to medium-sized businesses that show prospects for growth. Because the cannabis sector has shown tremendous potential for growth over the past years, VC funds are looking to invest in marijuana. In fact, some of them are seeking out marijuana stocks even while the number of deals between marijuana firms and other investors lowered.
According to MGO | ELLO National Cannabis Practice cited by Forbes, venture capital investments have almost doubled last year. Data shows that there were 307 deals between VC investors and 277 marijuana companies in 2019. This amounts to $2.62 billion, with a median of $2.5 million, in investments in the industry. The median post-money valuation of these deals is $20 million.
This shows a significant increase from 2018 numbers as only 217 deals in 197 companies took place. This only amounted to $1,55 billion, with a median size of $2.57 million and a median post-money valuation of $19.63 million.
This shows that private equity markets remain strong, even while public markets are slowing down. Venture capital investors, who are known to take high risks and get high yields, can remain optimistic about the cannabis sector in the long run.
The Forbes report explained that this trend could mean that the United States cannabis sector could flourish more, especially as these activities are mostly seen in US companies. Some of the VC funds that sealed deals last year include Phyto Partners from Florida with 23 deals, Poseidon Asset Management from California with 21 deals, and Entourage Effect Capital from Texas and Arcadian Fund from California with 20 deals each.
4 Reasons for the Success of Cannabis Stocks
The discussion about stocks and venture capital investment above shows that the marijuana sector has become successful over the past years not only in terms of demand, legislation, development, and economics. This is due to a combination of a variety of reasons. Here are some of the most important ones.
The Time is Now
As with any industry, timing can be everything. Marijuana is covered by the Controlled Substances Act, which made it completely legal for a time. Fortunately, some states have legalized the medical and recreational use of the plant, with some federal legislation allowing the production of hemp as a crop.
Combined with the call for legalization and increased awareness of the public, the time is right for the marijuana industry. Legalization has also allowed investors to enter the sector in various parts of the supply chain, from cultivation and harvesting to processing, packaging, and distribution.
When it comes to the consumer side, it is important to remember that the plants were being consumed even before legalization, which means that the industry already has an existing market.
Effective Cannabis Marketing
Aside from the circumstances that led to the success of the sector, marketing has also contributed a whole lot. Digital marketing platforms have allowed companies to reach their target market, especially because traditional venues restrict and event prohibit the promotion of cannabis products and services. Even platforms that offer paid advertisements prohibit marijuana-related firms from using its services.
With digital marketing strategies, such as cannabis SEO, companies were able to promote, advertise, and even inform the public about their offerings. Search engine optimization or SEO has become a great resource for these firms. This helps them get their website onto the search results pages, which gets customers in touch with the company. This is not only a great way to increase sales and revenues, but also a good strategy to inform people about the benefits of marijuana.
Social Media and its Effects
When talking about digital marketing, any business can never go without a cannabis business social network, especially with the digital native generations being in part of the target market. Most consumers have their own social media accounts on various platforms such as Facebook, Instagram, and Twitter. With a business social media account, you can better introduce your product to your followers.
Moreover, you can use it to promote your website by posting links of valuable and relevant blogs published on your site. This can increase engagements, boost visitors, create leads, and, lastly, improve sales. As these websites offer functions such as instant messaging and comments, you can also use your social media account as a mode of communication with your market.
The legalization has also paved the way for more in-depth research. Because the plant was illegal federally, research organizations do not have the room to conduct scientific studies. However, with marijuana laws in place, more and more institutions can conduct their studies in states where weed is legal. In fact, some universities even offer formal education on the plant, its application, and policy-making.
In the current situation with the pandemic, policymakers are even adapting to the needs of your market. Take DC for example. In the past, weed delivery is not allowed, but with the stay-at-home order and encouragements to isolate, the local government has made curbside pickup and door-to-door delivery legal.
Some dispensaries even reported an increase in sales during the height of the pandemic. This is because of the increased anxiety levels of people due to the virus outbreak, which they stave off with the use of marijuana products.
Cannabis stocks and venture capital investment are soaring this year. With a positive outlook on the industry, owners can expect an improvement in terms of investments. Just remember that the stock market is volatile and can fluctuate depending on market situations.