Getting Too High? Canadian Marijuana Stocks Skyrocket, Raising Bubble Fears

Photo Credit: Bloomberg News

As Canada prepares to legalize recreational marijuana, licensed pot companies north of the border are booming. But critics warn overly optimistic projections and a potential weed glut are making valuations way too high.

The pot bubble threatens Canada’s plan to become the Silicon Valley of recreational pot, according to this week’s cover story by Barron’s, with the country’s five largest publicly traded marijuana companies each valued at over C$1 billion.

Marijuana backers envision the industry eventually rivalling alcoholic beverages. Constellation Brands, which owns such brands as Corona beer and Robert Mondavi wine, estimates cannabis products could rake in $200 billion in global sales within 15 years, and one pot-industry bull sees Canada’s marijuana retail sales reaching C$9 billion annually within a few years, Barron’s reported.

“This is a market that is simply way bigger than a lot of people believe,” Daniel Pearlstein of Toronto-based Eight Capital told Barron’s, predicting Canada’s marijuana market could be a once-in-a-lifetime chance for investors to get in on the ground floor of the next big thing.

But current sales and cash flows don’t match the sky-high valuations of Canadian pot companies, Barron’s notes, with some companies trading for more than 100 times their total 2017 sales, and exponentially higher than last year’s cash flows. “Some have market values that are larger than estimated sales for Canada’s entire recreational marijuana market,” Barron’s reported.

“The valuation of our industry in the stock market reflects a level of enthusiasm and optimism about the world market, which I think is warranted.”
Neil Closner, CEO of MedReleaf

Canada’s marijuana industry has a current stock-market value of around C$30 billion — about half the market cap of the country’s gold mining industry.

Among the biggest licensed pot companies, Canopy Growth Corp. has a market value of C$6.7 billion, with C$69 million in revenue over the past 12 months, and Aurora Cannabis Inc. has a market value of C$4.5 billion with 2017 revenue of C$31.1 million.

As a point of comparison to U.S. tech companies, Yelp Inc. has a market cap of about $3.4 billion and took in about $847 million in 2017 revenue, and Ubiquiti Networks has a market cap of about $5.3 billion and 2017 revenue of $865 million.

Critics say cannabis bulls are underestimating the effect of a pot glut, and are ignoring the lessons in Colorado and Washington, two U.S. states that legalized recreational marijuana in recent years only to see retail prices plummet after the supply caught up with the initial spike in demand.

According to one price tracker, legal weed prices in the U.S. fell 20% in 2016, and another 16% in 2017.

And when recreational pot gets the final go-ahead in Canada, likely later this year, it won’t be an entirely free market. In the two most populous provinces, Ontario and Quebec, weed will only be sold from government stores, which will dictate the price and squeeze the margins of pot producers.

Vic Neufeld, the chief executive of pot producer Aphria Inc. — with a market value of C$2.4 billion on 2017 revenue of C$25.5 million — warns that companies that think it’s impossible to lose money in pot are likely to learn a lesson the hard way.

“L.P.s that haven’t made profits while scaling up will continue to burn cash and ultimately disappoint investors,” he told Barron’s.