2-for1 Sale
Canadian cannabis cultivators have been some of the hottest stocks to go public during this decade. After its initial public offering (IPO) and then listing on the NYSE, Canada’s leading cannabis cultivator Canopy Growth (TSX:WEED)(NYSE:CGC) is up by over 1,960% since debuting in April 2014 on the TSX and closing at $2.59 per share at writing.
While it’s doubtful that Canopy or any of the major cultivators can generate similar such returns in coming years, the hype surrounding cannabis stocks is far from over.
Legal cannabis demand to grow
What is undeniable, despite the naysayers, is that the legal cannabis industry is here to stay and will continue to grow at a solid clip, with analysts tipping that global sales will expand at a compound annual growth rate (CAGR) of around 24%.
That indicates there are considerable fortunes to be made, but it won’t be by cultivators, instead it will be made by those companies engaged in providing the required technology, biotech and management infrastructure as well as delivery systems.
This is becoming ever clearer even as cannabis cultivators like Canopy are struggling to operate profitably and are in the process of being acquired by established liquor, pharmaceutical and tobacco companies as they branch into the cannabis market.
Constellation Brands owns about a 40% stake in Canopy for a US$4 billion investment, and it appears that the billion-dollar liquor giant could be positioning itself to absorb Canada’s largest marijuana cultivator with co-founder and co-CEO Brue Linton stepping down.
Leading tobacco company Altria made a US$1.8 billion investment in Cronos Group to acquire a 45% stake, as it moves to reposition itself and enter alternate markets as tobacco sales continue shrinking at a rapid clip. It’s also likely that, because the moat for cultivators is quite narrow, there will be an explosion of marijuana growers once the U.S. federal government legalizes cannabis use in one form or another.
Technology to lead the next round of IPOs
There is every sign that there will be a rush of cannabis technology IPOs in the wake of Akerna, which spiked by nearly 224% one day after listing and has since pulled back sharply as an increasingly negative outlook for the cannabis industry in the wake of Canopy’s disastrous results weighs on marijuana stocks.
One delivery system designer and manufacturer slated for an IPO in 2020 is Pax Labs which designs and manufactures vape delivery systems. Two months ago, it completed a US$420 million equity raising and was valued at US$1.7 billion. Since then it has signed definitive agreements with a range of cultivators including Aphria and Aurora Cannabis to provide cannabis extracts for its delivery systems.
Another cannabis company where there is growing speculation that it will IPO is Cannalife Capital which is focused on developing businesses developing cannabidiol (CBD) products. Earlier this year it announced it had signed a letter of intent to acquire Blue Sky Biologicals, a manufacturer of cannabinoid healthcare and pet care products.
Blue Sky has established the Golden Harvest brand and is developing a suite of pet care, cosmetic and personal care cannabinoid products for launch in Australia, China, Thailand, Japan, Canada, Mexico and the U.S. It has also established global manufacturing practice (GMP) standard pharma grade facilities in China which are producing organic cannabinoid products.
Foolish takeaway
There will be a slew of cannabis IPOs focused on technology, manufacturing and delivery systems over coming months, as the size of the global legal cannabis market becomes apparent and market opportunities are emphasized. The legalization of marijuana extracts, edibles and topicals in Canada on or before October 17, 2019 will create a massive opportunity for all business along the marijuana value chain.
While there are claims that cultivators such as Canopy are incapable of producing enough marijuana to meet existing demand, it will be the growing demand for edibles, delivery devices, medical applications and platforms for managing regulatory compliance which will offer the greatest opportunity.
