Why Are Cannabis Firms Losing Money?

Why Are Cannabis Firms Losing Money

Cannabis is nearing full legalization nationwide. Industrial hemp is already legal federally, with 33 states permitting it for medicinal use, and a further 10, growing quickly, liberal about its use recreationally too. Despite this, marijuana remains a Schedule 1 drug. Big companies, like Cronos Group and Canopy Growth, have seen 65 percent-price dives on stock since highs last year. This year looks worse already.

The drop in last year’s weed stocks led to much speculation, with some comparing it to the many busts of days gone by, such as the dot.com industry in the 2000s. Under federal law, cannabis is a “Schedule 1 drug,” and has been for many decades, where it shares company with very dangerous drugs, such as heroin and LSD. All growing, manufacturing, extracting, or selling occurred very underground.

Welcoming New Times

Marijuana was the subject of much hype after half the country recognized its medical benefit and legalized it for therapeutic use. Hype only grew as recreational laws started falling too, with countries, like Canada, now following suite. Marketing exploded, putting the industry in constant spotlight online, a pleasant change from the oppressive solitude of the past. +

However, with this hype came complications. Advertising created much anticipation, since marketers were flooding the internet with content promoting the marijuana industry. This created perfect conditions for massive expansion, much like bursting its way out of the shadows after a whole century spent hiding there. Major stock exchanges listed several big producers.

Legal marijuana stocks, which began souring as momentum took hold, lured many investors into pouring cash into this industry. However, as with most stories too good to be true, this one starts with a few red flags too. Unforgivingly, and near no exceptions, cannabis stocks fell dramatically throughout 2019, with some falling even double-digit percentages. As the New Year, new decade, began, the market is sluggish.

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For many in the know, a major contributor to why these stocks plunged is the fact that underlying business is still not making money. It is losing. In its last quarterly report, Canopy Growth, the biggest weed stock by market cap, showed payments in share-based compensation much higher than income it was generating in net sales.

The Hype: Real or Not?

Cannabis is losing its “novelty” status now that it is becoming legalized state-by-state, country-by-country, and across the world. It has little allure, being a plant anybody can nurture, just like any other crop, such as wheat or corn. According to Forbes, over 9,000 folks are cultivating cannabis in the United States, notably and unmistakably exceeding breweries in the country.

· Price Wars

Initially, only a few folks were growing weed. High prices were easier to charge and more worth each dollar. However, new businesses quickly saturated a fledgling industry, creating immense competition the likes of which slashed stock prices by half. Further price compression is likely the future of the industry. Investors began ditching stocks. Tilray fell 90 percent. Canopy Growth 60 percent.

· Constant Fraud

CannTrust, a Canadian company, TSE:TRST allegedly grew illegally, which led to official suspension of both its growing and selling licenses. This affected the whole industry negatively and significantly. Investors lost confidence in weed stocks. If a company, like CannTrust, could actively deceive regulators, it is likely that other companies are doing the same, and if not, what is stopping them?

Even worse, the U.S. Food and Drug Administration published the results of its tests on cannabidiol, or CBD, saying it “cannot conclude that CBD is generally recognized as safe” specifically for food use. It sent Curaleaf, CNSX: CURLF, a warning letter, claiming its products all “misbranded drugs,” and which violates the Federal Food, Drug, and Cosmetic Act. Its share price fell with sheer abandon.

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· Financial Hurdles

Selling weed, even if legal, is still money laundering. The very definition of it. Accessible banking is difficult, frankly impossible, to get if you work with cannabis in any way. As legalization spreads and is more widespread, it remains federally illegal. Money traced back to pot activities could put the bank at risk of criminal charges for both money laundering and “aiding and abetting” federal crime.

· Weary Community

If current federal law is creating public safety issues by forcing cannabusiness to operate solely with cash, the potential public health woes need thought too. Some in the medical community support the use of cannabis therapy, but most do not. Most want weed to stay illegal. This is terrible, since hospitals lose federal funding if they treat patients with cannabis, or even talk about it with them.

Marijuana Delivery in California

Already, anyone can type “weed delivery near me” into their search engine and have the best quality available to them at the highest possible convenience. However, the future is not quite green. At least yet. The U.S. appears to have little appetite for cannabis reforms this year, or any soon. Two House votes aimed at reforming cannabis banking laws and de-scheduling weed remain on the House floor.

Meanwhile, according to NASDAQ, Majority Leader in the Senate, Mitch McConnell, has no appetite for legalization either. This insecure environment is not ideal for business of any kind. Yes, the future might see some changes, but there is no chance whatsoever of marijuana reform happening in 2020 at the federal level. None at all.

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Many marijuana businesses maintain penny stocks, trading primarily over-the-counter. If regulators choose to free the herb properly, then large corporations and investors could finally enter the investment fray. A few marijuana stocks might survive, but for now, cannabusinesses are not making the money they believed they would. Of course, easy access to an illegal market is worth considering too.

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Comments (3)

  1. Avatar for Carole Carole March 14, 2020 / 8:34 am / Reply

    This is very useful information

  2. Avatar for Billie Billie March 15, 2020 / 12:37 pm / Reply

    This is very unfortunate. Thank you for the information

  3. Avatar for Leona Leona March 16, 2020 / 9:08 am / Reply

    Very useful info!

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