Are pot start-ups rolling joints for big companies to smoke?
With marijuana becoming legal in more and more countries, investors have been pouring money into pot start-ups. Indeed, marijuana is set to be a booming business soon, with legalization across the world being simply a matter of time. Yet, bigger fish are entering the market silently, and when the pot smoke clears, they might be the ones to get the last laugh. Here's more.
High times for pot start-ups
While there are a number of pot start-ups out there, the biggest by market value are Toronto-based Cronos Group, Vancouver-based Aurora Cannabis, and Ontario-based Canopy Growth. Of late, investors have also been pouring money into British Columbia-based Tilray, so much so that Tilray's stock price has doubled in just three trading days. Moreover, it seems like the frenzy is far from getting over.
Are the investors high?
While none of these start-ups are profitable yet, their average price-to-sales ratio based on expected revenues for 2018 is a whopping 185, as reported by Bloomberg. That basically means investors are willing to pay $185 per every dollar of sales these companies make. That's a lot of faith. Understandably, many are starting to think that pot stocks are a bubble waiting to be burst.
Wall Street thinks investing in pot start-ups is worth it
Of course, these investors and enthusiasts all expect sales to catch up with stock prices fairly soon. Even Wall Street seems to be in agreement with them, with analysts predicting that revenues for Cronos Group, Canopy Growth, Aurora Cannabis, and Tilray will grow by a whopping 304% in 2018, and by an even higher 389% in 2019.
Coca-Cola is eyeing the marijuana market, bad news for start-ups
However, big players are eyeing the marijuana market. The biggest head-turner is Coca-Cola which, last week, was reportedly in talks with Aurora Cannabis for developing marijuana-laced drinks. The news saw Aurora's stocks jump 41%, but it's likely that the majority of the benefits of the deal, should it be penned, would accrue to Coca-Cola. Coke could also pull out, and opt for in-house development.
Mega breweries are also looking to get high
Coke isn't the only behemoth looking to get high. Last month, Corona beer owner Constellation Brands announced a whopping $4bn investment in Canopy Growth, taking its share in the start-up to 38%. Other mega breweries like Diageo Plc and Molson Coors are in talks with, or have already partnered with some pot start-ups. It's only a matter of time till they start absorbing start-ups.
From cigarettes to joints
It's also likely that big tobacco companies will want a puff. While cigarettes are unlikely to go out of fashion anytime soon, smoking prevalence rates are dropping in the US, and big tobacco companies like the Altria Group and Reynolds American might be tempted to dip their hands into the pot cookie jar. After all, the pot market is expected to be worth billions.
Sharing might be caring, but big companies might not care
While pot start-ups are enjoying all the fame right now, the potential of entry several big players could cut their joy short. Be it big breweries, big tobacco, or Coke, all these companies have massive capital, extensive distribution networks, and more-than-requisite experience in the intoxicants/addictive substances space. With the marijuana market promising a fortune, it's unlikely that they'll want to share the cake.
