This Nearly $400-Billion Tech Giant Is Now in the Marijuana Business

By Markets Fool.com


Image source: Getty Images.

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Marijuana has supporters and investors seeing green, and the industry could be on the precipice of expanding by leaps and bounds in 2016.

Since California became the first state to approve compassionate use of medical marijuana in 1996, two-dozen states have followed suit. Two states in 2016, Pennsylvania and Ohio, passed medical-marijuana laws through their respective state legislatures. With these two states now on board, half the country has, or will very shortly have, access to medical marijuana with a prescription from a primary-care physician.

Beyond just medical marijuana, four states have approved the sale of recreational marijuana to adults 21 and up since 2012. In Colorado, for instance, legal marijuana sales of recreational and medical marijuana have totaled more than $1 billion on a trailing 12-month basis. Last year alone, the state wound up raising about $135 million in taxes and licensing fees, much of which is being disbursed to the state's education department, law enforcement, and drug-abuse programs.

The elections coming up this November offer another opportunity for the cannabis industry to leap forward. As of now, five states have marijuana initiatives on the ballot, and another roughly half-dozen are being considered, or supporters are still collecting signatures.

The King Kong of these votes will come from California, the largest economy in the U.S., and one of the largest economies in the world. Recreational approval in California would represent a major financial and psychological victory for the cannabis industry.

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Image source: Office of Public Affairs via Flickr.

Capitol Hill continues to stand in the way

Despite this momentum, lawmakers on Capitol Hill remain steadfast in their wait-and-see stance on marijuana. Most lawmakers are of the opinion that a full safety profile on marijuana has yet to be established, and many would like to see how the "experiment" works out in states like Colorado, Washington, Oregon, and Alaska before considering a move to reschedule cannabis. Currently, it's considered a Schedule 1 drug, implying it has no medical benefits and is illicit.

This scheduling by the federal government has kept a lid on marijuana's potential. Without federal support, financial institutions have mostly avoided what looks to be a burgeoning industry that ArcView Market Research anticipates can grow by 30% per year through 2020. In total, only around 200 of the 6,700 financial institutions in this country are working with businesses in the cannabis industry. This means dealing solely in cash on many levels, which is both a growth constraint and a security concern.

Federal inaction has also led marijuana businesses to pay much higher tax rates than "normal" businesses. Internal Revenue Service tax code 280E establishes that any business that sells a substance defined as illicit by the federal government is not entitled to normal business deductions. Not being able to take deductions on their taxes means cannabis-based businesses are paying tax on gross profits rather than net profits.


Microsoft CEO Satya Nadella. Image source: Microsoft.

Say hello to the newest marijuana player, Microsoft

Capitol Hill's stance against marijuana has essentially kept corporate America away from the cannabis industry up to this point. With the exception of one or two publicly traded cannabinoid-based drug developers, you simply couldn't find a household name working with the cannabis industry... until now.

As announced last week, tech giant Microsoft is partnering up with Los Angeles-based start-up Kind to build and promote what's known as "seed to sale" cloud software that can help states, counties, and cities fully track and regulate the production of marijuana from the grow farm to retailers. It should be noted that this software is strictly being targeted at the 25 states that have chosen to legalize and regulate medical marijuana up to this point.

To be clear, Microsoft is still walking on eggshells by partnering with Kind, the company that developed the software that Microsoft will now assist in further developing and marketing. Microsoft is still keeping a healthy distance from individual cannabis businesses, and it isn't stepping within a stone's throw of funding marijuana businesses. Microsoft will solely be focused on working with Kind's government-solutions segment.

However, because this is the first instance of a large corporate entity making its presence known in the marijuana industry, it's a big deal. It clearly shows that the public opinion of marijuana is rapidly improving. Gallup's October poll showed that 58% of respondents favored full legalization -- and that the growth opportunity within marijuana, which could potentially grow into a nearly $22 billion industry by 2020 per ArcView, may be too tempting to pass up.

Microsoft's Azure cloud platform is a key component to its growth beyond just its dominant Windows operating system. If it can establish itself as a dominant cloud player in the cannabis industry early on, it could have a new avenue for growth in the coming years and decades.


Image source: Getty Images.

Microsoft's entrance reminds investors of this key point

In the grand scheme of things, Microsoft's marijuana venture is only going to work out to an extremely small percentage of total revenue in the near term, at best. However, Microsoft's entrance into the marijuana business serves as a great reminder to investors that there's ample opportunity beyond the simplistic buy-and-sell nature of retailers.

The marijuana business is sprouting growth opportunities in dozens of different areas, including tourism, software, marketing, banking/lending, security, logistics, regulatory, and consulting jobs. This is on top of the standard growing, processing, and selling that most investors think about when discussing the cannabis industry. Microsoft's venture into marijuana serves as a teaching tool that the most attractive opportunity for investors who want to take advantage of marijuana's growth rate is probably going to be in one of these ancillary industries, as opposed to the growers, processors, and retailers of the plant.

Of course, there are two things worth considering here. First, it's probably going to take more state-level approvals to coax more recognizable corporate names into the fray. Businesses are only going to feel comfortable when there's certainty that the federal government isn't going to step in. And additional state approvals could move the needle closer to federal action in terms of medical and/or recreational legalization.

Secondly, we should still remember that most marijuana companies are losing money, and as such, are probably not suitable for long-term investors. Most marijuana businesses still trade on the over-the-counter exchanges or are penny stocks, which makes them incredibly risky, and makes getting accurate and up-to-date information a challenge.

Ultimately, we could see marijuana grow into a solid investment if the federal government changes its stance. But until such time as the federal government changes its tune, I'd suggest that investors keep their money safely invested elsewhere.

The article This Nearly $400-Billion Tech Giant Is Now in the Marijuana Business originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.