Marijuana Market and Its Inevitable Legalization

By: Eli Levi  |  February 11, 2022

By Eli Levi, Business Editor

While doing some research into the United States’ cannabis industry, I noticed a few interesting things. The first is with regards to the U.S.’s federal regulations on marijuana. Marijuana legalization is one of very few issues today which has bipartisan support but has not been legalized. Many argue that the primary reason the plant has not been legalized yet is that the core demographic which opposes legalization are the “silent generation” conservatives, which constitutes enough of the Republican party to prevent its legalization. As the silent generation conservatives leave office, many think U.S. marijuana legalization is inevitable.

Based on this premise, some think the cannabis industry is undervalued for a couple of reasons. One reason the industry is arguably underrated is because marijuana is currently illegal in the U.S. at the federal level (as a “Schedule 1” drug, marijuana is illegal in basically every scenario except for the purposes of research), many brokerages do not allow investors to buy U.S. cannabis securities (however, all brokerages allow the trading of Canadian cannabis securities). Whenever there is a restriction of access to a security, it can be a sign of an opportunity for many. Interestingly, Canadian cannabis securities tend to be listed on American exchanges (like the NYSE and Nasdaq) because cannabis is legal in Canada. Whereas American exchanges do not allow American cannabis securities to be listed because it is illegal at the federal level. This forces American cannabis securities to list on Canadian exchanges.

One challenge that the marijuana industry may face is that there is already a very large illegal market for marijuana and there is no guarantee that it will shift legal. But assuming Marijuana does become legal and there are low tax rates on cannabis (unlike in California) the extremely large (illegal) demand for cannabis should shift legal. If the tax rates are not over the top then demand should shift legal because the prices should come down for legal marijuana as the industry innovates and scales.

Another reason that the cannabis industry is severely undervalued is that because it is illegal at the federal level, companies need to build completely new infrastructure in every state they want to do business in because they cannot currently cross state borders with cannabis. Once cannabis is legal, shipping and production costs should decrease significantly because budding cannabis companies can develop cheaper ways to produce, distribute, and market their products.

As a newer industry, there is plenty of room for innovation in products and medical-use cases which some believe will yield the greatest return. Instead of drinking alcohol and waking up with a hangover, there will be THC or CBD filled drinks that can cause similar intoxication effects without the painful aftermath of drinking as evidenced by the partnership between beer and marijuana companies.

The primary argument against marijuana as an investment opportunity is that once it is completely legalized, it will be treated like any other commodity, which may remove all pricing power (the ability to sell a product for more than the cost of the underlying commodities which go into creating it). For example, an iPhone costs more than the metal and plastic required to make an iPhone. Apple’s brand, their specialized labor, and the machines required to make the computing chips, the sophisticated software, are all examples of components of Apple’s pricing power. Marijuana is a plant and even though it is difficult to grow the fear is that cannabis gains the status of all other commodities, and is subject to the same underlying concepts and demand structures. Since there is a longer growing season in Mexico, the plant will most likely be grown there due to the capability of producing more, likely for cheaper, and therefore boast a significantly higher profit margin.

The marijuana industry is only beginning. The room for innovation is boundless, and there are so many cannabinoids in marijuana that have yet to be explored.