The cannabis industry has become a major headliner in recent news with the dramatic increase in the share price of cannabis companies with commentators asking if the industry is heading for a dot.com bubble style burst.
The whole debacle came to head with Tilray, a premium medical cannabis company, which was briefly worth $20 billion in September 2018, up as much as 94% in the span of a day. Some reports linked the sharp increase to the news that the Drug Enforcement Agency approved Tilray’s plan to import a cannabis product that could be used to treat neurological disorders. Roughly one week later, the company’s stock took a dive when US border officials stated that Canadian cannabis investors could be banned from entering the US.
Earlier this week, cannabis stock values took a dive after PepsiCo announced to investors that it had no plan to invest in cannabis companies.
While attention on the sector could be seen as a good thing, Bloomberg suggested that the overvaluations are weighing heavily on the sector and another outlet analogized cannabis company valuations to bitcoin. Forbes has even delved into the debate regarding the valuation of Canadian medical cannabis company Canopy Growth, which began exporting its products outside of Canada into Europe, Latin America, and the Caribbean. It also launched a partnership with Constellation Brands.
We spoke with GrowLife (PHOT) CEO Marco Hegyi to obtain one insider’s perspective on what the overvaluation buzz could mean for cannabis at large. Hegyi is no stranger to the tech industry, having spent 35 years in tech with Microsoft. During that time, he saw software take off from a relatively insignificant space to the major player it has become today.
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Megyi says GrowLife, which supplies equipment and products for outdoor and indoor cultivation, is the leading “picks and shovels” company of the cannabis “green rush.” The company’s proprietary growing technology boasts 76% energy savings compared to traditional grow rooms. They offer consulting as well as distribution to all 50 states in the US, with three brick-and-mortar stores in Calgary, Portland, and Los Angeles.
We asked Hegyi to help us understand the recent activity in the stock markets and whether it will have an impact on the industry’s future.
We’re experiencing volatility in the stock market for cannabis. What’s happening?
We were involved in a similar situation back in 2014 when Colorado’s recreational marijuana statute took effect. A recreational use law allows the general public to use marijuana without having a medical necessity subject to some restrictions like age. GrowLife, which is a publicly-traded company, and a number of other publicly-traded companies experienced a hyper-valuation within a few months. The SEC came down hard and said why don’t we cool off the market. They tried to do it with a memo to investors, but investors ignored the memo and increased the values. Back then our trailing 12-month revenue was $4.5 million in sales, and we were valued at $540 million dollars. That’s 120 times revenue. No one belongs in that revenue.
It’s easy to get investors excited about the potential. There are some companies that have high multiples [valuation] compared to fundamental performance. We have seen this before but we run our company based on fundamentals and we feel like we defend our valuation. Some of the companies going through hyper-growth out there need to be looked at by the financial community and asked: “Is this really worth what it’s worth?”
My advice is investors should be cautious. Some of these companies have big valuations and sometimes people can get in, but to get out is more difficult. Every company should be approached on case-by-case business. Especially Canadian companies in the US.
Can you identify any factors that led to the overvaluation situation?
I think some news makes people excited and once somebody sees a few others buying, they start to buy in too. This is classic to any growth market. It has little to do with the cannabis industry. Most people don’t understand the laws, they just start seeing people buy in and make 10% on a day like bitcoin, so they buy more and more and eventually there’s a collapse.
I think there are two main factors that have changed investors’ mentality in recent years. First was when Colorado went recreational in 2014. The market got very excited and popped significantly. There were also some nice moves here and there primarily from Canada when it voted to legalize marijuana on June 19, 2018. On October 17, 2018 when Canada goes recreational, it will probably be a very exciting time. But those are usually the days people sell out.
The other time that I think made the industry pop is when Constellation Brands, [the maker of Corona and Modelo beers] and a reputable investor, invested $4 billion in Canopy Growth [the Canadian cannabis grower]. That almost validated the cannabis industry. So, we are seeing very high valuations for some of these growers. And when these companies bounce they bounce hard, up to billions of dollars per day in value. It’s not for the faint of heart. Get advice and know what you are doing.
What does this mean for the cannabis industry at large?
I think it’s actually a little dangerous because the federal government has made its position very clear. They are not legalizing cannabis nationwide yet. So, anybody who is betting big on US going recreational nationwide is speculating. I don’t really understand, frankly, why some of these valuations are so high. I think Canada is about a population of 30 million and we have 360 million in the US, so I think that they are looking at a play into the US, perhaps a distribution policy. But that would mean the federal government would need to cooperate with interstate commerce and that’s not the case.
Some states allow licensed companies to sell and once in a while you’ll see some support from the DEA such as allowing testing or the DEA supporting formulation of CBD with less than 0.1% of THC to go through some testing, but it doesn’t necessarily mean that it is legalized. So as much as people would love to see it legal, it could easily just flip and it depends on what the administration and Congress want to do. I think they’re at odds.
Will we see other events like this continue to happen?
It always gets worse before it collapses. Once it collapses everyone gets a wake up all. We saw Attorney General Sessions pull the Cole Memo, which was designed to create cooperation between states and feds regarding cannabis laws. The Cole Memo provided him with the right to pull it, but he made a big deal about it. When Attorney General Sessions spoke up, half the market value of cannabis companies went down. If you are going to put money into these high-risk, speculative, highly-valued companies it should be money that you’re willing to risk because you could lose half of it overnight.