The Opportunity and Threat of Marijuana Legalization

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The Opportunity and Threat of Marijuana Legalization

Marijuana stocks are the hottest thing since “Bitcoin, circa 2017.”  Marijuana has been a huge hit in the illicit market for at least 60 years.  And, as most advocates will tell you, government has concluded that, as with the prohibition of alcohol, the treatment is worse than the disease.  As a result, jurisdiction-after-jurisdiction is slowly removing penalties and moving to transform the formerly illicit industry into one that is both encouraged and heavily taxed.  As the theory goes, people will responsibly consume Cannabis as they do alcohol, cutting criminal organizations out of the supply chain.  Tax revenues will soar while the costs of law enforcements and running prisons for users and dealers fall.  Best of all, marijuana will become just another consumer product like alcohol and tobacco, with huge profit margins projected for the dominant brands.

Under this scenario investors, consumers, and governments all win.  Right?  Well, that depends on the validity of the underlying assumptions. 

Let’s consider the facts as we know them in 2019.

We’ll start with the size of the worldwide market for medical and recreational marijuana.    Today, the worldwide illegal marijuana market, currently totals around $200 billion a year.  Therefore, a figure of $150 billion for the global market size for legal marijuana makes sense, if you assume recreational marijuana will be fully legalized throughout the world in the near future.  For now, though, Canada and Uruguay are the only countries that have legalized the use of marijuana for recreational purposes. 

Beyond merely replacing illicit marijuana, some promoters insist that marijuana will potentially disrupt the alcohol, cigarettes, and pharmaceuticals industries via substitution.  That’s a much bigger deal. 

The global alcoholic beverages market is estimated to be between $1.3 trillion and $1.5 trillion.  And there appears to be a good chance that cannabis-infused beverages could capture part of that market.  Major alcoholic beverage maker Constellation Brands was bullish enough about the potential for cannabis that it recently invested $4 billion in Canopy Growth.

Similarly, cannabis products could disrupt the cigarette market by being used for smoking cessation.  The worldwide tobacco and cigarette market (outside of China) is estimated to be at least $680 billion. The smoking-cessation product market is much smaller, of course. But it's growing—and could reach $22 billion by 2024...

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