There is no denying that 2018 was a major year for the legal cannabis industry. Last year, legal cannabis broke new ground in many ways. Several U.S. states legalized medical or recreational marijuana, as did Canada. The FDA approved the first cannabis-based drug treatments. Companies saw their stocks rise to tremendous new highs (and, in some cases, fall disastrously). It seemed that the dynamic of the industry changed every day, with fast-paced mergers and acquisitions (M&A), new companies launching and older outfits coming to prominence.
After the excitement of 2018, cannabis investors in particular and the financial world more broadly are watching to see what will happen in the new year. 2019 could continue the momentum built during the dramatic rise of cannabis companies in 2018. On the other hand, it is also likely to bring many new challenges which may exert pressure on the cannabis industry. Below, we'll explore some of the biggest challenges and barriers that the legal marijuana space is likely to encounter in 2019.
Canadian Legalization Will Be Tested
Canada moved to legalize recreational marijuana use for adults in October of 2018. Since that legal shift, there has not yet been adequate time for investors to determine just how this will impact the crop of cannabis companies operating in Canada. Needless to say, expectations have been high, both among eager investors and on the part of companies which have moved to quickly expand operations.
Once financials for Canadian marijuana producers and distributors begin to offer a more accurate assessment of the impact of nationwide legalization, it's likely that company valuations will shift. Indeed, with valuations of many names running higher all the time, some analysts expect significant corrections which might end up hurting investors. Many of these companies have already seen their stocks plummet from pre-legalization levels, as analysts have questioned some companies' strategies and methods. Expect that greater interest in company performance in 2019 will further separate out the winners from the rest of the pack.
An Ever-Changing Landscape
In 2018, Canopy Growth Corp. (CGC) acquired the intellectual property of a Colorado-based marijuana research company, ebbu. It's likely that 2019 will bring additional mergers and acquisitions to the top of cannabis industry headlines. While customers and investors should expect a continued stream of news regarding buyout deals and expansion plans, 2019 is also likely to bring new challenges related to intellectual property acquisitions as well.
As the legal cannabis industry continues to establish itself to greater degrees, it's also likely that other, more established companies outside of the industry will get involved in more significant ways. Constellation Brands Inc. (STZ), a stalwart of the beer manufacturing industry, invested more than $4 billion in Canopy Growth in 2018. This next year is likely to bring significant changes as more tobacco, alcohol and other companies look to claim a piece of the cannabis space. For investors, this likely means increased unpredictability and volatility.
The U.S. Market
Some of the challenges facing the cannabis space in 2019 are likely to be continuations of prior issues and problems. One significant factor is the U.S. market. The U.S. remains a highly complicated space for cannabis companies and investors, in large part because, while cannabis remains illegal at the federal level, a growing number of states have allowed cannabis companies in thanks to local legalization decisions.
For cannabis companies looking to expand into the U.S. market, it's not so easy as simply setting up shop in a state which has legalized cannabis. Companies are forced to deal with myriad legal and financial barriers, with many companies having to seek out capital from Canadian investors. Other outfits have to navigate the complicated world of importing and exporting products which remain federally illegal, as well as the issues surrounding operating across state lines when laws change dramatically around the country.
Investors might look to companies which have developed into large-scale operations in the Canadian market for a clue as to how these firms will break into the U.S. market in a similar way. As of yet, though, this has proven a significant challenge.
Another issue facing the U.S. market is banking. Congress has yet to lift banking restrictions which have limited the potential for expansion among U.S.-based cannabis firms. Investors should watch out for news about the SAFE Banking Act and the STATES Act, both of which could have a dramatic impact on the ability of U.S. cannabis companies to grow and thrive.
New Products, New Challenges
In 2019, new products are likely to take the cannabis industry by storm. Innovative new hemp- and CBD-based products, vaping equipment, edibles and more are all in various stages of development. While some of these products will probably not have a significant impact on the cannabis industry overall, others may prove to be gamechangers. The latter is particularly likely if cannabis-related products, such as CBD, are removed from Schedule I classification. This status change would allow for rapid adoption across the U.S., potentially developing into a major segment of the cannabis market virtually overnight. Given that the 2018 U.S. Farm Bill moved to deschedule hemp, some analysts expect that hemp-related products in particular could be on the rise in 2019.