Surprise! The Market for Canadian Marijuana Stocks Could Be 2 Times Bigger Than Expected

Just how big could the marijuana market in Canada actually be?

The country's top medical-marijuana suppliers are eagerly anticipating the prospects of enormous new revenue growth after Canada legalizes recreational use of the drug. Their stock valuations reflect what investors expect to be a huge market potential, with Canopy Growth Corporation (NASDAQOTH: TWMJF) boasting a market cap of more than $2 billion and several of its peers claiming market caps greater than $800 million.

There have been several attempts at quantifying the market size for recreational marijuana in Canada. The latest effort to do so, however, could mean that the prospects for Canadian marijuana growers are much bigger than previously thought.

Prior estimates 

Canada's Parliamentary Budget Officer (PBO) performs a similar duty as the Congressional Budget Office (CBO) does in the United States. Like the CBO, the PBO estimates financial costs of proposed legislation. One year ago, the PBO released a report detailing the financial considerations related to legalization of cannabis in Canada.

The PBO focused on estimating marijuana consumption in the country, and then used projected prices to determine what the market size might be, as well as what levels of taxation could be appropriate. A detailed analysis of multiple factors led the PBO to project that the marijuana market in Canada would be between $4.2 billion and $6.2 billion in 2018.

Legalization of recreational marijuana, however, would also lead to increased consumption, according to PBO estimates. Marijuana usage in Canada is expected to increase from around 635 million metric tons in 2018 to 734 million metric tons by 2021. Using this consumption growth projection, the marijuana market in Canada could be in the ballpark of $7 billion within four years. This $7 billion figure matches up with the Canadian government's Task Force on Cannabis Legalization and Regulation estimated the size of the illegal recreational-marijuana market in Canada to be currently.

The PBO's projected market size is also roughly in line with an analysis performed by a global professional-services firm. Deloitte released a report last year that estimated the base Canadian recreational marijuana market would probably be between $4.9 billion and $8.7 billion annually.

Latest (and greatest) projection

There's now a new estimate of the Canadian recreational-marijuana market -- and, if it's right, the previous views of the market size are way too pessimistic. Colin Firth (not the actor, an analyst of the marijuana industry in Canada) partnered with polling and market research firm Oraclepoll Research to find out how large the market could really be.

Firth and Oraclepoll Research surveyed 5,000 Canadians over the summer, asking them 75 detailed questions about marijuana use. This survey is more recent than any of the previous ones used to determine estimates. The PBO, for example, relied on a 2012 survey. Deloitte conducted its survey in 2016, but opinions can change significantly over a year's time.

So what did Firth and Oraclepoll Research find? Instead of 5.2 million marijuana users in 2021, their survey suggests the number could be more than 11 million. It's possible, of course, that this latest survey is only an anomaly and that previous estimates will turn out to be more accurate. However, it also seems plausible that there has been a change in Canadians' viewpoints, as they have recognized that legalization of recreational marijuana could happen.

What it could mean for marijuana stocks

If Firth's survey results are the most accurate, take all the numbers you've heard about the possible Canadian marijuana market size so far and double them. Canopy Growth and its peers could be looking at a market between $8 billion and $12 billion annually.

Practically speaking, a much larger opportunity changes the dynamics radically for Canadian marijuana stocks. It could mean that what seem like ridiculously high valuations for these stocks aren't so ridiculous after all.

Aurora Cannabis (NASDAQOTH: ACBFF), for example, claims a market cap of nearly $880 million. Its stock trades at a stratospheric price-to-sales multiple of 62. But if Aurora could capture just 5% of an overall market that's worth $10 billion per year, the stock's growth potential easily justifies what appears to be an outrageous current valuation.

There's also another key factor that could help marijuana stocks. If the Canadian marijuana market truly could be twice as large as previous estimates, more big players could look to acquire (or, at minimum, buy stakes in) current marijuana growers. Major alcoholic-beverage company Constellation Brands recently bought nearly 10% of Canopy Growth. That deal could be just the tip of the iceberg if the projections from Firth and Oraclepoll Research are on target.

Should investors jump into Canadian marijuana stocks based on the latest survey results? That's probably not a good idea. For now, those results are an outlier. However, it probably won't take too long after legalization goes into effect to get a pretty good feel for which projections are more accurate. We could find out that Canopy Growth Corporation's middle name is more appropriate than anyone imagined.

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Keith Speights 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.