Marijuana Investment: Risky Business Or High Returns?

Investing in the cannabis industry is an enticing prospect for many, but it's not without its risks. The industry is still developing, and investors must navigate a complex web of legal and financial challenges. While the legal cannabis market is projected to reach $102.2 billion by 2030, investors need to be aware of the potential pitfalls before taking the plunge.

Regulatory uncertainty

The regulatory environment for marijuana is constantly evolving, with changing laws and regulations that impact businesses operating in the industry. As of January 2020, state legislatures and Congress were considering 975 cannabis-related pieces of legislation. This creates uncertainty for investors as new regulations could change the way cannabis businesses operate.

The regulatory uncertainty also affects the banking and financing options available to marijuana companies. As long as marijuana is federally illegal, it will be difficult for these companies to open US bank accounts, making it more challenging to secure funding and conduct business operations. Many banks are hesitant to loan to marijuana companies due to the legal uncertainty, and these companies often have limited access to basic financial services.

The regulatory landscape can also impact investor sentiment and the demand for cannabis products. As laws and regulations change, investor sentiment can shift drastically, potentially affecting the industry as a whole. Additionally, as more companies enter the market, supply could outpace demand, especially if high excise taxes are applied to marijuana sales.

The regulatory uncertainty in the marijuana industry creates a risky investment environment, and investors must be prepared for potential shifts in the legal and business landscape.

Volatile stock prices

The marijuana industry is still developing, and so are the laws and regulations that impact businesses operating in the space. This means that stock prices for cannabis-based companies are volatile, as many companies are new and have short track records. Investors are looking at future growth potential, but they don't have perfect information. That means there can be wild swings in stock prices as more information comes out.

Because the industry is so new and rapidly changing, it's tough to know when a stock is at a good price to buy or is overpriced. Even an existing cannabis business's numbers can be unreliable, since the environment in which they previously operated changed based on new laws and regulations.

Marijuana stock investors also have to understand that there are some emotionally invested shareholders out there with the potential to wreak havoc on share prices. Retail investors are far likelier than institutional investors to allow their emotions to come into play when buying and selling stock, and few topics incite emotion more than marijuana. At the drop of a hat, emotionally driven investors can push pot stock valuations far higher than makes sense, creating a bubble. Likewise, emotions can push marijuana stocks significantly lower, perhaps below a fair value estimate for their intermediate-term profit potential. In short, expect wild volatility thanks to retail investors.

Another factor contributing to volatile stock prices is the inexperience of management teams. This is to be expected in a budding industry that's still illegal in most countries. Axim Biotechnologies, for example, is a clinical-stage cannabinoid-based therapeutics developer founded in 2010. While the company's pipeline could prove its worth in the future, its management team and those of numerous other pot stocks are potentially prone to mistakes.

Financial risks

The marijuana industry is still developing, and the laws and regulations that govern it are also in flux. This creates a certain level of uncertainty that can be a financial risk for investors. For example, as long as marijuana is federally illegal, it will be difficult for marijuana companies to open US bank accounts, obtain loans, or gain access to basic financial services. This makes it difficult to secure funding and can lead to a reliance on cash, which poses significant risks from a liability and accounting perspective.

The industry is also highly volatile, with stock prices swinging up and down in short periods. This is due in part to the newness of the industry, with many companies having short track records, and investors relying on future growth potential rather than perfect information. This can lead to wild swings in stock prices as new information comes to light.

Marijuana stocks are also subject to dilution, as the legal uncertainty around cannabis limits the ways in which marijuana businesses can raise money. Many banks will not loan to marijuana companies, and while venture capital funding is increasing, some venture capitalists are hesitant to enter the industry. As a result, marijuana companies may issue more stock to fund their growth, which can reduce the value of shares currently held by investors.

The balance between supply and demand in the marijuana industry is also uncertain and prone to fluctuations. If supply exceeds demand, the prices of marijuana products may fall, causing businesses and investors to lose money. This is a particular concern as more companies enter the market, and supply could outpace demand.

Finally, investing in marijuana companies that trade over the counter carries additional financial risks. These companies are not required to file regular financial statements, so investors may not fully understand the risks they are undertaking. Additionally, the lack of minimum market capitalization requirements can hinder the trading of their stock.

Political shifts

For example, in 2018, Attorney General Jeff Sessions rescinded the Cole memo, giving state-level attorneys general the discretion to bring marijuana charges against people and businesses, even in states where it is legal. This shift in policy demonstrated a more anti-cannabis stance from the federal government and highlighted the potential for political shifts to impact the industry.

The legal status of marijuana at the federal level also affects the ability of cannabis-based businesses to obtain financing and other routine services through banks, making their funding more tenuous and operations more cumbersome. This creates a unique investing challenge, as these companies have fewer options for raising capital. Many banks are reluctant to loan to marijuana companies due to the legal uncertainty, and venture capital funding, while increasing, still has some hesitation from investors.

The political landscape can also impact the regulatory environment, creating uncertainty for investors. As laws and regulations continue to evolve, the way cannabis businesses operate may change, affecting investor sentiment and potentially the industry as a whole.

In summary, political shifts can directly impact the legal status and regulatory environment of the marijuana industry, creating risks for investors. These include challenges in obtaining financing, uncertainty in business operations, and potential shifts in investor sentiment.

Inexperienced management

The marijuana industry is still developing, and so are the laws and regulations that impact businesses operating in the space. As a result, the management teams of most marijuana stocks are very inexperienced. This is to be expected, as the industry is still illegal in most countries and is just beginning to emerge in others.

A good example is Axim Biotechnologies, a clinical-stage cannabinoid-based therapeutics developer founded in 2010. Axim wasn't always focused on the cannabis industry. In fact, it was known as Axim International when it was first established, and only changed its name in July 2014 to reflect its new business focus. Prior to this, the company had an organic waste marketable by-product business, which has nothing to do with cannabis.

Axim's management team, and those of numerous other marijuana companies, are potentially prone to mistakes due to their inexperience in the industry. This is something investors need to be aware of, as it could impact the success of their investments.

The volatility of the industry, with its ever-changing laws and regulations, makes it difficult for even experienced managers to navigate. This is further complicated by the fact that cannabis-based businesses often struggle to obtain financing and other routine services through banks, which can make their funding more tenuous and their operations more cumbersome.

As the industry continues to develop and mature, management teams will likely become more experienced and better equipped to navigate the challenges of the industry. However, until then, inexperienced management remains a risk factor for investors to consider.

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