Unless you've been living under a rock, there's a pretty good chance you've heard about the once-in-a-generation investment opportunity that is the legalized marijuana industry. According to Bank of America analyst Christopher Carey, the cannabis industry could one day offer peak annual sales potential of $166 billion, and disrupt industries that currently total $2.6 trillion in yearly sales. Considering that only two countries worldwide have OK'd recreational weed, and just over 40 have legalized medical marijuana, the ceiling for the pot industry is still a ways off.
But when it comes to the biggest individual market opportunities within the marijuana industry, the United States takes the cake (or should I say pot brownie?). Per Carey, the U.S. would account for 34% of the $166 billion in peak annual sales, based on his firm's modeling.
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U.S. pot sales should triple over the next five years
However, a new report sheds light on just how fast the U.S. cannabis market is growing, as well as how much opportunity is still being lost to illicit marijuana channels.
This past week, Marijuana Business Daily (MBD) published its 7th annual "Marijuana Business Factbook," which details sale projections for the legal cannabis industry in the U.S. between 2018 and 2023, including an estimation of the breakdown between medical weed sales and recreational pot. According to the report, which breaks down revenue projections into ranges rather than a specific figure, here's how sales are expected to progress over the next five years:
- 2018: $8.6 billion to $10 billion
- 2019: $11.2 billion to $13.7 billion
- 2020: $15.7 billion to $19 billion
- 2021: $19.4 billion to $23.5 billion
- 2022: $22.4 billion to $27.4 billion
- 2023: $25 billion to $30.4 billion
Regardless of whether you're looking at top- or bottom-end sales, the gist is that between 2018 and 2023 we should see legal pot revenue essentially triple in the United States, perhaps even hitting $30 billion. Additionally, the overall economic impact of the cannabis industry on the U.S. should rocket from $39 billion to $48 billion in 2019 to more than $100 billion by 2023.
An inside look at medical marijuana sales projections through 2023
Even more telling is where this growth will come from. First, let's take a closer look at projected medical marijuana sales by year.
- 2018: $3.3 billion to $3.8 billion
- 2019: $4.2 billion to $5.2 billion
- 2020: $5.5 billion to $6.8 billion
- 2021: $6.4 billion to $7.8 billion
- 2022: $6.7 billion to $8.3 billion
- 2023: $6.9 billion to $8.4 billion
You'll note that medical cannabis sales really begin to taper off from a growth standpoint after 2021. The report notes that since 33 states have already legalized medical pot in some capacity, the opportunity to grow sales from new legalizations is waning -- especially considering that many of the remaining non-legal medical marijuana states have no intention of legalizing.
This revelation is a tad bit disappointing from the perspective of pot stock investors considering that medical marijuana patients tend to use weed products and buy more often than adult-use consumers. Medical patients are also typically more willing to purchase higher-margin derivatives (oils, topicals, vapes, infused beverages, concentrates, edibles, and so on) than adult-use consumers.
The U.S. recreational market is the marijuana industry's workhorse
Furthermore, as you'll note in the recreational marijuana sales figures by year, medical patients in certain states no longer have to go through traditional channels (i.e., seeing a physician and being prescribed cannabis) to get their hands on marijuana. This discourages medical marijuana sales and promotes recreational revenue.
Here's how the adult-use market is shaping up over the next five years, based on the report:
- 2018: $5.3 billion to $6.2 billion
- 2019: $7 billion to $8.5 billion
- 2020: $10.2 billion to $12.2 billion
- 2021: $13 billion to $15.7 billion
- 2022: $15.7 billion to $19.1 billion
- 2023: $18.1 billion to $22 billion
These projections suggest that recreational marijuana revenue will more than triple in the U.S. over the next five years, providing the bulk of the sales growth for cannabis companies. Specifically, sales in California should continue to expand, with Arizona expected to legalize adult-use pot in 2020. Meanwhile, adult-use sales in more established legalized states, such as Colorado, Washington, and Oregon, should advance but slow considerably from years past. California remains the most lucrative of all states, with some estimates on Wall Street forecasting up to $11 billion in annual sales in the Golden State by the end of the next decade.
The black market remains massive
Despite this incredible growth rate, "Marijuana Business Factbook" also alludes to the enormous black market that continues to operate behind the scenes. As much as state legislators would like to believe that providing a legal pathway to cannabis sales will eliminate illicit production, this simply isn't the case.
MBD's special report finds that the black market currently accounts for between $50 billion and $60 billion in annual sales (assuming this cannabis were being sold through legal channels) in the United States. Although more sales are likely to shift into the legal market as new states legalize in some capacity, as well as grow organically, shifting the pendulum toward legal channel sales as the primary means of marijuana purchases in the U.S. won't be easy.
The big problem is that legal marijuana simply can't compete with black market cannabis on price. Consumers usually have to pay state and local tax, as well as an excise tax, on recreational marijuana purchases. On top of this, businesses typically lose time and money waiting for state regulators to approve cultivation, processing, distribution, and/or sales licenses. And, should these businesses be profitable, their home state and the federal government could collect income tax on their profits. As icing on the cake, since marijuana is a Schedule I drug, cannabis businesses are subject to Section 280E of the U.S. tax code, thereby disallowing normal corporate business deductions, aside from cost of goods sold. This can lead to exceptionally high effective tax rates for profitable pot companies.
Comparatively, black market producers and consumers won't pay one cent in state and local taxes or excise taxes. Growers also don't have to wait for the official go-ahead from state regulators to produce or sell marijuana. And, lastly, there are no state and federal tax implications, since everything is being conducted under the table. Mind you, this is all illegal, but nevertheless not deterring a $50 billion to $60 billion underground cannabis economy.
California is the perfect example of an illicit-market haven
California has been an especially stark example of the black market's vice grip on sales. The Golden State's forecasted tax revenue came in at about half of initial estimates in 2018, its first full year of legal adult-use sales. At the heart of this shortfall is an up to 45% aggregate tax on cannabis in some locales, which has made legal marijuana's per-gram price substantially higher than the black market.
For example, even though MedMen Enterprises (NASDAQOTH: MMNFF) increased revenue by 22% in the third quarter from the sequential second quarter, much of its sales growth came from acquisitions in Arizona and Nevada. In MedMen's California locations, sequential quarterly sales growth tallied a measly 5%. Since MedMen hasn't mentioned anything noteworthy with regard to statewide supply issues in its past operating result press releases, my suspicion is that it's contending with the pushback of consumers being unwilling to pay inflated legal prices. That's a problem considering that MedMen is losing a lot of money on an operating basis right now.
And California isn't alone. Even the legal weed industry in Canada has struggled to retake market share from the black market, despite a reasonably low excise tax of just 10% on recreational marijuana. Since there's no precedence to legalization, there's also no road map as to how best to contend with ridding the market of illicit producers and retailers.
Suffice it to say, even as legal-channel sales grow, the black market should continue to thrive, too, throughout the U.S. and North America.
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