Cannabis stocks: budding investment or bubble that could burst?
In the coming years the cannabis industry is set to grow at a rapid pace, but with public companies in the sector trading at 85x price/sales valuations some fear a bubble on the verge of bursting.
Over the last two years, cannabis stocks have exploded in value as investors excitement for the sector reaches fever pitch, with the Cannabis ETF climbing more than 72% since it was launched at the tail end of 2016, outperforming both the S&P 500 and the Nasdaq.
In an interview with IGTV, Morgan Paxhia, co-founder and managing partner at Poseidon Asset Management warned that the biggest risk to the cannabis industry is potentially ‘heading into too euphoric of a situation where there’s too much capital chasing too few areas of this industry’ which could lead to the ‘bursting of a bubble’.
Cannabis industry set to grow as legalisation spreads
The growth of the cannabis industry is tied to the legalisation movement that has already taken hold in the US, Canada and in other parts of the world, with start-ups finding it easy to attract venture capital funding, while larger companies looking to go public are finding their IPOs oversubscribed.
The excitement around the cannabis sector understandably high when looking at the growth in global sales. According to BDS Analytics, global sales of marijuana will grow to $146.4 billion in 2025, up from $16.9 billion in 2019, as the commodity goes from the back-alley drug to the mainstream consumer product.
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Is the cannabis industry overvalued?
With sales set increase seven-fold over the next six years it is perhaps unsurprising that cannabis stocks are trading at a price/sales valuation of 85x there are some investors that are worried that inflated prices could cause a market bubble to burst.
‘Certainly, you see a lot more excessiveness in the public markets,’ Paxhia said. ‘There is limited access for most investors to get exposure to cannabis from an investment perspective.’
‘Even institutions, so they are stuck with what is trading on the NYSE or the Nasdaq… so you have this crowding effect that has caused massive swings and very significant valuations.’
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