Pot Lots Part 2: The Business of Big Cannabis

Joe Weisenthal (0:02)

Americans have changed their minds about weed.

SPEAKER_2 (0:05)

It's estimated that demand for recreational marijuana could be as big as $45 billion a year. That's bigger than both wine and chocolate.

SPEAKER_3 (0:14)

It's no secret marijuana is no longer a budding business, it's booming. Sales in North America totaled $6.7 billion in 2016, an unprecedented 30% increase.

Joe Weisenthal (0:25)

Absolutely, and this is the headline everybody wants to hear, the marijuana market could be about to boom big time. The New Frontier data says that legal cannabis could expand the national market to about $21 billion by the year 2020 That's up from $5.7 billion last year, and an expected $7.9 billion this year.

Tracy Alloway (0:51)

That was the buzz leading up to 2018, when investors around the world were caught up in the craze for cannabis stocks. Pot was on its way to being legalized in Canada, and there were rumblings of a similar move in the US.

Shares of companies like Tilray, a Canadian pot company, soared by more than 1,000% that year before crashing down to earth soon after.

Justin Trudeau (1:12)

We will soon have a new system in place, one that keeps cannabis out of the hands of our kids and keeps profits away from organized crime. Today, I'm also pleased to announce that the new recreational cannabis regime will officially come into force on October 17th of this year.

Joe Weisenthal (1:30)

In October of 2018, Prime Minister Justin Trudeau announced that cannabis was legalized in Canada. Since then, numerous states in the US have taken steps toward legalizing a drug that was once vilified literally as the devil's lettuce.

But despite all these tailwinds, pot stocks are still struggling, and there is huge question marks over just how the rollout of this brand new market is going to go.

Tracy Alloway (1:55)

This is our cue to welcome you back to potlots, our deep dive into what's going on with the legalized marijuana market.

In our last episode, we talked about what was happening in New York and the tension that currently exists between the illicit market for weed and the new legal one.

On this episode, we'll dive a bit more into the business model of legalized marijuana before getting into the efforts at creating social equity in our third and final episode.

Joe Weisenthal (2:20)

It's not every day that you get to witness the birth of a new market and all of the pains and hiccups and weird logistical and existential issues that come with it. And that's what really interests us here.

What is the state of the New York cannabis industry right now and where is it headed? Is it being designed in a way that's fit for its purpose?

Will legal cannabis sellers be able to make money? Will they be able to compete with the illicit market guys who have been in this business for a long time? And will investors still be interested? Can the market live up to the hype?

Tracy Alloway (2:53)

To understand where things are going, we are going to begin by checking up on what's happened so far.

Remember, not that long ago, there was once a ton of investor excitement around cannabis. We had a bunch of new companies created, several cannabis-focused exchange-traded funds were launched. Joe and I recorded a couple episodes on the industry, but all that excitement and the share prices as well, they seem to have stagnated since then. The lines on the chart have moved down and to the right.

Todd Harrison (3:20)

It's been a rough couple of years for the cannabis space. You're talking about a lot of operators, a lot of pioneers, a lot of entrepreneurs who have been working for four or five years and not gotten paid.

Tracy Alloway (3:30)

That's Todd Harrison, the founding partner and chief investment officer of CB1 Capital, an investment firm specializing in cannabis. He describes what the mood is like amongst pot investors and the big cannabis companies known as multistate operators or MSOs after a tough few years.

Todd Harrison (3:47)

For some reason, cannabis entrepreneurs, the MSOs, the pioneers are viewed with disdain by some politicians and others in small business. It's a bit oxymoronic, right? These are entrepreneurs that figured out and are working toward building a US based industrial complex, right? US supply chain, homegrown and something that I think we can all agree should not be illegal, should not be a reason that people are put in jail and should not be something that's used against somebody, whether they want to get a job or whether they want to run for office.

Joe Weisenthal (4:22)

Todd's own interest in cannabis was formed during a big moment in New York and US history. He worked on Wall Street for more than three decades at Morgan Stanley and Galleon and even Jim Cramer's old firm.