The Past is Not Always Prologue
It’s time to address the elephant in the room. High flying cannabis stocks, fueled by big promises that couldn’t deliver big profits, earned the industry a black eye with investors. Probably deservedly so. The sheer enthusiasm for a market being created practically from the ground up attracted fortune hunters, as well as seasoned traders looking to stake a claim in a hot and growing consumer market.
There has been plenty of analysis, discussion, and debate over what transpired in the cannabis market, from overvaluation to under-scrutinized business plans. While we can certainly evaluate and learn from the past, we needn’t let past challenges temper future enthusiasm. In fact, two macro trends continue to drive the market and set the stage for a new wave of investment opportunity.
First, cannabis continues its slow and steady march towards legalization in the United States. With five states passing cannabis policy ballot measures legalizing either medicinal or recreational use of cannabis on 2020’s election day, plus Oregon decriminalizing possession, legal change is in the air. It is well within the realm of possibility to project 10-12 new states pursuing legalization in the next 12 to 24 months, perhaps including powerhouse players like New York.
Second, the underlying dynamics of the cannabis industry are driving technology innovation. The promise of a tax revenue windfall has fueled state legalization efforts, however high taxes create a challenging revenue model for cannabis operators. Further, without blanket federal legalization in place, operators cannot realize the efficiencies of integrated and streamlined cultivation, supply chains, production, marketing, or any other operations. As a result, any technologies adapted to the cannabis space that address the staggering inefficiencies baked into the system are worth consideration.
Still, not all technology is created equal. Investors would do well to carefully consider how technologies can reduce friction from production through the point of sale while also anticipating burgeoning market sectors and considering how a fully legal market might change the value proposition for certain technology platforms.
From our perspective, there are three interconnected facets of the cannabis industry where technology can be a game-changer today and endure as the market grows and expands.
From Field to Formulation to Format
Innovation starts in the field. Compared with other aspects of the industry, many cannabis cultivators are operating decades behind. Cannabis has been grown for years with no monitoring, data capture, or analysis. Instead, basic, off-the-shelf spreadsheets have been used to maintain rudimentary records of environmental conditions and year-over-year yield. Cultivators operating in this capacity are forced to look backward to the previous growing season rather than make intelligent, predictive, data-driven growing decisions to maximize future performance.
Emerging technology platforms such as GrowIQ enable growers to rapidly integrate real-time, field-based monitoring into their operations. Using a network of sensors, growers can automatically gather a treasure trove of growing data and then mine that data through a dynamic, web-based dashboard. Every input can be captured and monitored throughout the grow, including changes in temperature, wind flow, and humidity, all of which can greatly affect yield and quality.
These kinds of technology solutions give cultivators real-time insight into their grow in order to make adaptations, maximize their yields, and protect their crops from mold and other diseases.
As formulators and manufacturers rush to explore new products and formats for cannabis consumption, improvements in extraction become paramount. Growth in the edibles market and adjacent categories like personal care products is expanding the playing field for cannabis. But extracting THC is a decidedly difficult process. Terpenes, which give inhaled cannabis its aroma and flavor, don’t necessarily perform the same way in an ingestible format, especially in beverages. Without careful manipulation and precise processing, extracted THC can impart less than pleasant tastes, potency, and performance.
For investors, the potential upside for new extraction technology to power edibles is enticing. With a market eager for a better solution, this will be a first-in-wins game while succeeding solutions fade. Coffee extraction technologies – many of which are built on proven platforms and are highly proprietary – are being considered for purchase and/or license to be adapted to the cannabis space. When successfully re-engineered, these technologies could shorten the time of extraction, improve yields, and produce superior products.
Edibles and Beverages
From gummies to confections to beverages, edibles have emerged as a convenient and discreet format for everyday cannabis consumption. The COVID-19 pandemic has not slowed the roll of edible growth. In fact, a recent global market trajectory analysis reports the following:
“Amid the COVID-19 crisis, the global market for Cannabis Edibles estimated at US$2.9 Billion in the year 2020, is projected to reach a revised size of US $11.8 Billion by 2027, growing at a CAGR of 22.3% over the analysis period 2020-2027. Solid Edibles…are projected to record a 22.5% CAGR and reach US $9.2 Billion by the end of the analysis period.”
While there is no shortage of edible products currently available, THC beverages are an exciting category extension. Improved extraction would fundamentally change the way THC-infused beverages perform, making them taste more like the hard seltzer and adult sodas that have taken the adult beverage market by storm. This innovation could catalyze the nascent THC beverage market into the mainstream.
What’s more, as technology and brewing techniques become more widely available, the potential for creating an ultra-premium THC beverage market will become a reality. Similar to the craft brewing and spirits markets, it is not a huge leap to imagine the emergence of craft breweries for THC beverages, with local brewers carefully curating, cultivating, creating, serving, and selling premium beverages.
When You Have a Hammer, Every Problem Looks Like a Nail
In cannabis, not every problem needs a technology solution. Take payment systems for example. Federal law prohibits credit card companies from processing cannabis purchases. Customers must use cash or a debit card, and cannabis retail locations are home to ATMs.
Recently, cannabis-specific payment technologies have emerged to enable customers to make cannabis purchases with a credit card. While the promise of processing credit card payments might burn bright for an investor, what happens when legalization becomes a reality? Will cannabis retailers still pay a premium for a proprietary payment system, or will the major credit card companies eagerly invade the market with lower cost, easy-to-integrate options?
One could assume that the major banks and credit card processors already have their cannabis payment processing platforms well in development and are geared up and ready to go when the inevitable happens.
The Future is in the Fundamentals
While cannabis legalization efforts on federal and state levels continue unabated, cannabis operators are still hampered in their ability to scale and realize true operational efficiency. Technology developers, however, are unencumbered by these restrictions.
For investors, technologies that enhance customer experience, improve product performance and drive operator performance – like cultivation, extraction and edibles – are worth evaluating. Not only are these technologies, and others that address fundamental operational issues and produce performance, poised to grow, but we can anticipate that they will sustain their market value over time.
Choosing the right investment opportunity will always require due diligence. Still, diligence requires foresight. Investors need to evaluate fundamental forces driving the market and anticipate how the market may evolve over time to fully realize an investment’s potential.