Is Marijuana the Next Bubble?
NEW YORK ( MainStreet) Investments in the legal cannabis industry are booming as Americans are demonstrating their support to continue legalization with the passage of new marijuana regulations in several states.
The legal marijuana market is estimated to grow by 64% to $2.34 billion in 2014 from $1.44 billion, according to a recent report by The ArcView Group, a cannabis investment and research firm based in San Francisco. The legal market consists of all states which have open sales of marijuana to people are allowed to possess it under their state law.
Six new states recently passed legislation allowing the use of medical marijuana, including Connecticut, Delaware, Illinois, Massachusetts, New Hampshire and Vermont, plus the District of Columbia. There are now 20 states permitting the use of medical marijuana. New York and Minnesota are likely to approve laws for medical use by 2016, according to ArcView's report.
Washington and Colorado passed laws recently which allow adults 21 and older the ability to legally purchase cannabis from licensed retailers. By 2017, seven new states are likely to seek the adult use regulations, the report said.
Legal marijuana businesses are cropping up in many states, but those who have definitive business models and mainstream strategies are able to attract funding from investors, boost their growth and achieve scale.
The potential for the marijuana market to increase to $10.2 billion within the next five years or a 700% increase from the current U.S. market value is very likely, said Douglas Leighton, managing partner of Dutchess Capital, a New York investment firm which manages $125 million in assets, has $200 million in direct investments and made its first investment in the cannabis industry recently. The "real growth" will arise when more states decriminalize the use of marijuana.
"I've never seen it where a market already exists for the product," he said. "The market is already there and it will gain wider acceptance."
Support for legalizing marijuana is widespread as support from Americans rose to an all-time high of 58%, a 10-point increase in a year, according to a Gallup poll last October. Washington and Colorado are expected to add $359 million and $208 million each to their respective markets in 2014 for adult use. Another 14 states are projected to pass adult use regulations in the next five years, including Alaska, Arizona, California, Delaware, Hawaii, Massachusetts, Maine, Maryland, Missouri, New Hampshire, Nevada, Oregon, Rhode Island and Vermont, the ArcView report said.
While there are very few public companies in this sector currently, the demand for them remains high, said Leighton. Some of the stocks appear to be expensive, but have risen substantially in the past six months, he said.
"I think the public stocks have gotten a little ahead of themselves," Leighton said. "There is a large amount of capital chasing a small pool."