Cannabis Stocks’ Dilemma: Rising Black Market Sales

Cannabis stocks have been on a roller coaster ride in 2019. The marijuana industry continues to evolve. Regulations play a vital role in the industry. As a result, ups and downs are common. There have been more headwinds this year, which makes investors’ question if their money is in the right stocks. Canada has been flourishing since it legalized marijuana in 2018. The country completed the second phase of legalization on October 17. However, thriving black market sales are still a challenge for the cannabis sector.

Cannabis sales in Canada’s black market

Canada legalized recreational marijuana a year ago. Statistics Canada said that licensed retail outlets sold more than $100 million worth of marijuana in July. However, industry analysts think that the number would have been higher without black market sales.

Canadian consumers still purchase cannabis illegally. Data from Statistics Canada’s National Cannabis Survey showed that close to 42% of cannabis consumers still buy products from an illegal source. The strict and strenuous regulation process is an issue. Also, a licensing bottleneck makes it difficult to have more legal shops.

A Quartz article stated that Statistics Canada data shows that Canada saw 79% of the black market cannabis transactions in the fourth quarter of 2018. The data shouldn’t be a surprise. Although Canada legalized cannabis in October 2018, it takes time for licensing. There would have been fewer legal shops in 2018.

However, a lack of variety in legal marijuana products and cheaper prices at illegal shops catch consumers’ attention.

Can Cannabis 2.0 reduce black market sales?

Canada completed Cannabis 2.0 on October 17. The country legalized cannabis edibles, beverages, vapes, and concentrates. Cannabis 2.0 introduced a new variety of products. Notably, the products should hit the stores by December. Deloitte projections show that the market opportunities for edibles and concentrates are 1.6 billion Canadian dollars and 140 million Canadian dollars.

Cannabis 2.0 could help deter illegal sales. On Monday, CBC reported that licensed cannabis producers in Canada think that legal edibles will help tackle black market sales.

Rising black market sales have impacted many Canadian cannabis companies’ revenues. Many of the companies have struggled with revenues and profitability this year. As a result, the stocks suffered. In the past few weeks, the cannabis sector has fallen. There has been pessimism that the sector’s revenues could fall this year. The Horizons Marijuana Life Sciences ETF (HMMJ), which tracks the North American cannabis industry, has fallen 8.2% in October.

Cannabis stocks have lost money in 2019

Aurora Cannabis (ACB), a prominent player in the cannabis space, reported a negative EBITDA in its last quarter. The company is launching a variety of edibles including chocolates, gummies, and vaping products. The company has submitted its products to Health Canada for approval. The products could hit the stores by mid-December. So far, Aurora Cannabis stock has fallen 16.4% in October.

Aurora Cannabis’s CCO, Cam Battley, said, “Canadians are purchasing edibles from the black market because they’re interested in alternative ways of getting high.”

He thinks that with a variety of products available after edible legalization, consumers will prefer safer and regulated products. He also said, “This will give the legal industry the real opportunity to make significant strides in replacing black market sales with attractive and safe adult consumer products.”

HEXO (HEXO) has struggled with revenues this year. The company expects to report lower revenues in the fourth quarter. As a result, the company withdrew its fiscal 2020 outlook. HEXO cited a delay in government approval for cannabis derivative products, regulatory uncertainty, early signs of pricing pressure, and pricing pressure as the main issues. To learn more, read Hexo Withdraws 2020 Outlook, Stock Falls 24%. The company will likely report a negative EBITDA of 11.1 million Canadian dollars in the fourth quarter. So far, the stock has fallen 32.0% in October.

Bruce Linton, Canopy Growth’s (CGC) (WEED) ex-CEO, thinks that Cannabis 2.0 could help reduce black market sales. Canopy Growth is also expanding its edibles, vapes, and CBD-based products market. Also, Canopy Growth and Constellation Brands (STZ) will launch cannabis-infused beverages. Canopy Growth stock has also suffered this year after its disappointing results last quarter. The company will report its results for the second quarter of fiscal 2020 next month. So far, the stock has fallen 5.1% in October.

Black market sales impact the US

Black market sales aren’t just a problem in Canada. CNBC reported, according to New Frontier Data, that the illegal cannabis market totals about $70 billion nationwide in the US—seven times the legal market.

A few states have legalized adult-use marijuana in the US. The states still face challenges from the black market. Despite being legal in California for two years, black market cannabis is still a booming business in the state. Data from the United Cannabis Business Association revealed that close to 2,835 illicit sellers, including storefronts and delivery services, are operating statewide. Black market sales lead to lower legal sales. As a result, the state is losing tax revenues. The state doesn’t have enough legal retail stores to meet market demand. Read Marijuana Policy: Can California Shape It for the US? to learn more.

A team of CNBC producers carrying hidden cameras discovered ten illegal cannabis dispensaries in Los Angeles.

Analysts have a different take on the legal and illegal cannabis issue. Cannabis industry analyst Andrew Udell, CEO of the popular blog “The Cannalysts,” thinks that it will take time for consumers to shift from the illegal market to the legal market. He said that regulations take time. Higher taxes and regulations increase legal products’ prices, which makes it easier for consumers to buy cannabis illegally at a lower cost.

What do we think?

I think that stricter regulations could combat illicit activities in states and rising black market sales. After cannabis is legal at the federal level, products will be readily available at a reasonable rate. Better availability and prices will reduce black market dependency. Since half of the country struggles to get marijuana legally, it isn’t surprising that people turn to the illegal market. Federal marijuana legalization could also help tackle vaping concerns. Linton mentioned that legalization will help create safe and health-friendly vaping products. The products won’t contain Vitamin E or pesticides, which can have any side effects.

In other news, HEXO rescheduled its fourth-quarter results to October 28. Stay tuned with us to learn how the company performed.

For more cannabis-related news and updates, visit 420 Investor Daily.