How to Invest in the Cannabis Rush

With cannabis industry growth exceeding 29% per year, there’s never been a better time to invest in a marijuana business.

Source: Steven Depolo / Flickr.

Due to the infancy of the cannabis industry, public stocks are still highly volatile with questionable underlying assets. Private companies will be the best investments for the next few years, and California will likely continue to be the largest market in the States. Canada also has a rapidly expanding legal cannabis industry.

Tech Platforms

Several tech platforms are gaining steam in the cannabis markets. At the top of the list is Weedmaps, which provides menus and contact information for local dispensaries and delivery services. People are able to place orders online through a dispensary storefront using Meadow. Budtrader also facilitates a large quantity of exchanges using a low-tech interface resembling Craigslist.

Several other companies are attempting to gain market share in this space, including Leafly, Leaflink, Tradiv, and Eaze. Despite the heavy activity, a functional wholesale marketplace is still absent. Other companies provide merchant services to cannabis companies that accept credit cards. In addition to the companies that enable transactions, the High Times and the Cannabist have gained a foothold in regulation-free media.

Auxiliary Services

Several types of service businesses are gaining traction in the industry. Cannasure provides insurance specifically for cannabis companies. Others, such as Green Rush, provide consulting services to help businesses get licenses and navigate regulatory requirements. Analytical testing laboratories are growing quickly, especially across the West Coast with companies like SC Labs, Analytical 360, and Steep Hill Labs.

Growing/AgTech

Producers are by far the largest constituent of cannabis companies, making this industry segment one of the least attractive for investment. As growing restrictions are eased, many cannabis greenhouses and growing facilities will be shuttered to cultivate the plants outdoors, where production costs are far lower. Growing will ultimately resemble widely used agricultural methods. The pesticides and fertilizers are not fundamentally different from those used on other crops.

Distribution

Large distribution networks are mostly absent since cannabis cannot be transported across state lines as long as the DEA classifies the plant as a Schedule I substance. In the long term, services dedicated specifically to transporting marijuana will disappear as FedEx, UPS, and other courier services begin openly accepting shipments.

Processing

Processing businesses are still highly fragmented and small-scale, leaving room for a company to gain significant market share in this segment. Cannabis must be refined and concentrated in order to get its active ingredients, namely THC and CBD, into cookies, vape pens, and other consumables. By excelling technologically and aggregating production capacity, companies like Northspur have huge potential to lower the costs of cannabis ingredients and consumables while also offering a more consistent, reliable source of cannabinoids to other manufacturers and brands.

Consumer Packaged Goods

Branded cannabis edibles, beverages, vape pens, and topical goods represent a majority of cannabis sales in the U.S. compared to flowers (bud). Chocolate, baked goods, candies, and drinks are widely available from companies like Kiva, Dixie, and Bhang. Several niche products, including gum and other infused foods, are being developed by smaller players. Processors hold a strong position to enter this segment at scale. Packaging products from Kush Bottles, Collective Supply, and MMC Depot are in high demand since states often have strict packaging requirements for childproofing.

Retail

Retail operations are mostly decentralized and unconsolidated, although some companies are much larger than others. A brief glimpse at Weedmaps provides insights into the largest retailers in each city. It is likely that several chains resembling BevMo (alcohol store) will thrive on a large scale, but these chains will face competition from grocery stores and gas stations, and it is hard to tell at this point which dispensaries have the best trajectory to become national retailers.