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Investment Analyst Doesn’t Smoke Cannabis, Predicts Bubble Will Burst

The Motley Fool is out this week with another report scaring investors away from Canada’s burgeoning cannabis market. Despite the immense growth of the industry in the lead up to next summer’s legalization efforts across the country, the finance rag reports that Canadian number crunchers Statistics Canada have pulled the curtain back from the wizard, showing that the cannabis industry is far smaller than previously thought.

According to the report, Canada’s black market for cannabis was worth an estimated $6.2 billion in 2015, although the article freely admits the difficulties in nailing down exact numbers in the underground drug trade. In comparison, The Motley Fool asserts, the wine industry is worth an estimated $7 billion, with no real industry giants listed on the TSX.

Looking back to cannabis,  Canopy Growth (TSX:WEED) has a market cap of $4.4 billion, and Aurora Cannabis (TSX:ACB) has a market cap of $3.2 billion. With those two companies combined valued more than the entire industry as a whole, The Motley Fool argues that clearly the sector is overvalued, with no room for market growth.

“That's not really the case.”

The report comes on the heels of investment advisor Edwards Jones’ awkward analysis of the industry earlier this week, in which the company called cannabis overhyped with “little barrier to entry.” In what was perhaps the most misguided advice of the year, the Edward Jones report recommended that investors interested in cannabis invest in companies that have nothing to do with marijuana.

Earlier this month Forbes printed a similar story. That report quotes analytics firm GT Research, who says that in 2018 Canadians are expected to consume around 474 metric tons of cannabis. The number contrasts other reports with higher figures of approximately 600 to 900 metric tons.

In an interview with Forbes, experts from GT Research argue that the discrepancy in numbers comes from misleading views on what makes a marijuana smoker.

“One thing you often hear about the cannabis market is that people will adopt cannabis en masse, around 17% if you believe the surveys,” said Damitha Pathmalal, Director of Research for GT Research to Forbes. “Then they go on to assume just because someone tries it, they'll become a lifelong user... That's not really the case.”

“Are We Seeing a Cannabis Bubble Begin to Form?”

In November The Motley Fool began throwing the “B” word around when talking about the cannabis industry - Bubble. According to a report, cannabis valuations are growing at a rapid pace, in some cases doubling, without ever turning a profit. The industry is speculative, according to the article, and investors would be wise to hold back.

As an example, the article looks at Shopify Inc. (TSX:SHOP)(NYSE:SHOP), who, after a report questioning the company’s business model, saw share prices drop 20 percent.

“Stocks that are based on hype can be very sensitive to news, and if tomorrow we find out that marijuana legalization is delayed indefinitely, then we would likely see cannabis stocks come crashing down. The industry is riding high today, but there’s no guarantee that it will be able to continue that way,” the article in The Motley Fool stated.

And if cell phones are banned tomorrow, Apple’s stock would come crashing down as well…

“We are pretty on target with projections, maybe a little over.”

Recently, Nevada published revenue statistics from the first few months of legal cannabis sales in the state. The combined recreational and medical marijuana markets outpaced projections just months after legalization went into effect. In October alone, cannabis sales reached $37 million and brought the state $5.8 million in tax revenue.

“We are pretty on target with projections, maybe a little over,” Nevada Department of Taxation spokeswoman Stephanie Klapstein told The Las Vegas Review-Journal.

The Motley Fool article argues that cannabis offers no room for growth. “The assumption for investors is that legalizing marijuana will create new demand and build on existing users. However, I’m skeptical that this will be the case. I’ve never smoked pot in my life and I can’t image I ever will regardless of whether it is legal or not,” the author writes.

Meanwhile, newly legalized states like Nevada are calling for special sessions of the state legislature because they have so much tax revenue they just do not know what to do with it.

For some reason, the old guard investor class seems bent on scaring investors off of the industry. Is it a risk? For sure.

But is it a risk worth taking? Just take a look at what is happening on the ground right now.

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