This Week in Weed: Has the bubble burst?

Cannabis was one of the hottest stocks on the market just a few months ago. But now the bubble has seemingly burst. Last week, Ontario-based Canopy Growth Corporation announced that their revenues fell short of a highly conservative Wall Street estimate, which sent shares to its lowest since December 2017. MedMen Enterprises, which operates dispensaries throughout the country, recently announced they would lay off nearly 200 employees. They say it’s part of a broader restructuring to achieve positive earnings by the end of 2020.

David Downs, California Bureau Chief for the cannabis website Leafly, says this is normal market behavior: “A lot of these companies like MedMen and Canopy, they're playing the tech company game, where they spend money and they try to get big and grab market share. The profitability is supposed to be down the line. All of a sudden, first and for new reasons, investors wanted to see profits now, and they've yoked back on their investments.”

The cannabis trade is similar to housing. Bubbles inflate, then burst. The cycle is a normal part of cannabis joining the mainstream economy, but it could have some adverse effects on business owners.

“Our Leafly jobs report has cannabis employment up 21% in California in 2019. Retail stores did about $1.5 billion in sales in year one last year, and that was with less than 500 stores,” Downs says. “But some standard startup cannabis businesses in California are partially funded by these public marketed companies, publicly traded companies in Canada. Those stocks are going down, and that affects growth plans in California, and that's triggered layoffs. More broadly, this lack of access to institutional capital is de facto red lining, all but the richest 1% from the legal industry.”

That doesn’t mean the cannabis market can’t bounce back. Downs says that the way forward is through federal legalization, which would open a path for access to small business loans. New markets like the MidWest are beginning to come online, which can drive valuations back up. When looking at the potential for cannabis, investors remain optimistic.