Narbé Alexandrian is president and chief executive officer of Canopy Rivers Inc.

One year into cannabis legalization in Canada, the capital markets are stuck in neutral. We have shifted away from a voting machine mentality (tallying up which companies are popular) yet have stalled on a flawed version of the weighing machine (valuing companies based on substance).

This flawed version is one of the reasons for the industry’s volatile market swings and it is blinding investors to the long-term value present in the coming waves of cannabis companies.

Story continues below advertisement

The voting machine defined cannabis stocks in the lead-up to legalization, like it does for many emerging industries. Press releases announcing flashy executive hires, M&A activity and unique partnerships caused upward spikes in the stock market. Things were booming and, despite having no sales, early entrants watched their stocks go on a run of growth. With no live legalization framework in place, company valuations were based on the merits around their forecast of revenue.

We saw this last year, with Aphria’s acquisition of three assets in Latin America. The market reaction to this go-global expansion was incredible: The stock price rose significantly immediately after the announcement, but the excitement didn’t last. A short-sell report threatened to expose these assets as vastly overvalued shells. Whether there was a grow op in Jamaica or a pharmacy in Argentina is almost irrelevant. What matters is the market’s reaction without testing the underlying substance.

Since then, the market’s shift to a weighing machine approach has been dogged by an attempt to value all companies by common factors, namely profitability. And for cannabis companies in growth mode, profitability is a bit of a long-term goal. The result is that investors are left scratching their heads, not really understanding how to assess viability, and powering up the voting machine to tell them what – and who – is coming next.

The more we focus on common factors and ignore the unique economics that drive businesses, the longer it will take to unlock the true, and very real, long-term growth potential in the cannabis industry.

After all, where would we be if we valued now-dominant technology companies by profitability rather than their unique economics? Uber isn’t profitable but continues to expand its ride-hailing services and tackle new geographies. Facebook took five years to reach profitability but there was never a question about its adoption rate during that same period. For the next wave of cannabis companies – ancillary businesses, science-backed biotech plays, branded products and those in the medical market – this presents a great opportunity to replicate the tech sector.

For ancillary businesses, which include anything from extractors to software and media platforms, valuation should consider which companies are increasing their customer base and tackling new geographies. For example, LeafLink, a business-to-business e-commerce platform, processes 16 per cent of all U.S. wholesale cannabis orders and has a strong customer base to activate as regulatory barriers crumble south of the border. This is the kind of unique factor that should pique our interest.

As more countries legalize, the marketplace for branded products will erupt as well. Unlike the non-cannabis consumer-packaged goods (CPG) sector, which is dominated by a few key brands, the branded cannabis products space is a battle fought by small and emerging businesses. The companies that win will not be the first to turn a profit, but the ones that are nimble enough to capture customer “mind share,” obtain premium shelf space in online and physical retail outlets, and eventually become acquisition targets for mass-market CPG titans.

Story continues below advertisement

Finally, the medical market is still a tiny fraction of its potential. Right now, there are more than 800 cannabis related clinical trials taking place in the world, estimated to be four times more than the average in many non-cannabis industries. Success in this market will come to those with credible clinical trials and studies before launching compliant and properly dosed products. Alignment with the best companies boasting the highest quality research and consistent growth in patient count will be the factors that determine success in the medical market.

When we focus on the unique economics driving each vertical, we start to see the industry’s untapped potential. But it has only been a year since legalization. We are still at the beginning.

A recent Deloitte report estimates the next stage of legalization, which will include adding edibles, will create a new $2.7-billion market in Canada alone. With upside like that, it would be a shame to see the capital markets push companies to profitability too soon, instead of reinvesting in new growth areas.

As the market matures, the closer we come to valuing companies based on their substance. And given some of the missteps in the past year, we owe it to ourselves – and the next crop of cannabis companies – to tune up the weighing machine.