A quick look at cannabis stocks will show that 99% of them are currently in the tank.
Many, like Tilray, Canopy Growth, MedMen and Aurora have lost more than 90% of their value and are at all-time lows or damn close to it.
Well, for starters, legal cannabis is a new industry that, like the internet 20 years ago, has attracted huge amounts of capital from a wide variety of investors. Just like the internet investors, many of these people have virtually no idea how to evaluate the merits of a company or business plan, particularly in an uncharted industry, and simply placed blind bets based on hype and the fear of missing out. “My neighbor’s investing, I’d better get in.”
From my own perspective, as a business owner who has founded, owned and operated companies in several other fast-growing industries (video production, DVD and CD-ROM publishing), it’s amazing to see how history repeats itself.
We never seem to learn.
Around 1995 I was offered the opportunity to get in on the founders round at Amazon. I passed on the opportunity. Several of my friends invested and ended up rich beyond their dreams, with $50,000 investments resulting in returns of $30-50 million after Amazon went public. Many people have asked me why I didn’t jump in, and I explained that at the time I had no idea what the internet was going to do in the future, or how an online business would work. Also, based on my media distribution knowledge at the time, I figured Jeff Bezos would get crushed in the book-selling industry by Costco (which sold best-sellers) and Barnes & Noble (which owned the deep catalog market).
I was dead wrong.
One of those investor friends who did invest in Amazon told me that while he didn’t know much about the internet, he met with Bezos and became convinced that he was brilliant and would make it happen one way or another. Bezos was famously hard-working and focused. However, for all the online successes that emerged in the late ‘90s, including Amazon, Google and eBay, there were hundreds of gigantic flops — Ask Jeeves, Pets.com, Infospace, eToys, Webvan, Kozmo.com and many others.
The flops greatly outnumbered the successes.
Cannabis is different from the internet and tech industry in some important ways. One of the biggest and most notable differences is that unlike most of the Big Tech companies, like Google, Microsoft and Amazon, where the barrier to entry is enormous, the barrier to entry in cannabis is, by comparison, negligible. (Try competing with Google on search!)
Cannabis is an easy-to-grow agricultural product. Oversupply is endemic and cyclical (just as in all ag products), brands barely matter and opening a retail store is relatively straightforward in most jurisdictions. What does all this mean? To me it’s simple: The winners in this industry will be companies that operate and follow the same business models as giants in the food and retail industries, like McDonald’s, General Mills, Tyson Foods and 7-Eleven. Their focus will be on operational efficiencies, great locations, consistency, profits and superior customer service.
Finally, gigantic market caps are unlikely to happen in cannabis because profits will never compare to those in industries that produce products with a high barrier to entry and big margins, such as commercial airplanes or pharmaceutical drugs.
So invest carefully! Invest in a management team and a sound business plan. And, perhaps most important of all, be skeptical of outrageous claims.