Marijuana Stocks: You're Missing 2 Key Points About International Expansion

Even with early-stage supply chain hiccups throughout Canada and in California, a market that could easily surpass all of Canada in yearly marijuana sales, the cannabis industry is thriving. According to Arcview Market Research, it's liable to grow sales by 38% in 2019 to $16.9 billion, and perhaps hit more than $31 billion in global revenue by 2022.

All eyes are on production and international expansion

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For roughly the past 18 months, capacity expansion has been the primary focus of marijuana stocks. The idea here is simple: Ensure there's adequate supply to meet demand for an industry that could easily generate $50 billion or $75 billion annually by 2030. As a result, companies like Aurora Cannabis (NYSE: ACB), Canopy Growth (NYSE: CGC), and Aphria (NYSE: APHA) have 14, 10, and three growing sites, respectively, that should be capable of at least 662,000, 500,000, and 255,000 kilos of annual production when at full capacity.

However, this trio of Canadian growers has bigger aspirations than just dominating their domestic market. They've been looking abroad to cement their production and/or distribution presence in as many foreign markets as possible. Aurora Cannabis expects to grow or distribute cannabis in 24 countries (including Canada), while Canopy Growth has production, export, distribution, or research deals in 17 countries (also including Canada). Aphria, for its part, has distribution capabilities in around a dozen countries worldwide, thanks to its acquisition of Nuuvera in 2018.

These international sales channels are viewed as being particularly important from the standpoint of geographic sales diversity. Not to mention that with medical cannabis markets relatively nascent in many of the more than 40 countries to have legalized medical weed, laying the groundwork for production or distribution infrastructure in foreign markets can provide first-mover advantages.

Here's what you should really know about overseas expansion for the pot industry

There's no denying the importance of international expansion. But investors also need to recognize the two key points about overseas expansion that they're probably overlooking.

1. International expansion won't really come into play for two or three more years

First of all, the benefits of international expansion probably won't begin to be realized until 2021 or 2022.

With most of the world's legalized marijuana grow farms located in Canada, regulatory agency Health Canada is counting on growers to meet domestic obligations before excess supply is exported to international markets. Given the ongoing ramp-up of production facilities and licensing issues -- Aurora's three largest facilities aren't licensed for production, while Aphria's biggest grow farm has been waiting for approval to cultivate for more than a year -- it's going to take until 2021 or 2022 before we get a really good look at what a fully operational and somewhat mature Canadian grow industry looks like.

To put this into another context, it's going to be another two or three years before Canadian growers are likely producing enough marijuana to satiate Canadian demand. Only when this domestic demand has been met will overseas production and exports become meaningful.

Maybe the biggest advantage of external channels is the ability to offload excess domestic supply. Even for a company like Canopy Growth, which has tallied more than 70,000 kilos in annual provincial supply agreements, it'll still need to find a home for more than 400,000 kilos of production each year. If the Canadian industry becomes inundated with supply by 2021 or 2022, the per-gram price of dried flower could fall considerably. That makes these external sales channels the perfect means to offload excess supply. But, as noted, that's not going to happen anytime soon, which is why Aurora, Canopy, and Aphria haven't reported much in the way of overseas cannabis sales.

2. The black market isn't going away, meaning global sales estimates are probably too high

The other factor that investors need to consider is that, even overseas, removing the black market from the equation isn't going to be easy.

Illegally grown and sold marijuana has been around for decades, and the legalization of marijuana in key markets isn't necessarily going to change that. For example, in Canada, as a result of supply issues, the black market looks to retain hold of 71% of countrywide sales in 2019. Even when many of these supply problems are resolved, which is expected in 2020, the black market will still control more than a third of all Canadian pot sales.

The same issues have been noted in California, where excise taxes on recreational weed sales, a wholesale tax on cannabis leaves and/or dried flower, and state/local taxes on general retail sales can add up to as much as 45% tax in select locales. As a result, the Golden State's cannabis tax revenue in 2018, its first year of full legalization, came in at only about half of what was initially forecast.

As long as a tax exists on legal cannabis sales, along with the time delays and fees for obtaining proper licensing, the black market will almost always be able to undercut legal sales channels on price. Illicit producers don't have to pay federal or state income tax, they don't have to wait for approval to grow or sell marijuana, and they certainly aren't going to pay excise taxes. It's for all these reasons that black market marijuana is here to stay.

So, long story short, yes, international expansion will be a very important piece of the puzzle for marijuana stocks over the long run. But, no, it's not going to matter much to sales or profits over the next couple of years, and, no, it's not going to drive out black-market growers and retailers.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.