In the lead-up to the October 2018 legalization of recreational cannabis in Canada, all eyes were on marijuana growers. It made sense. They were the companies that were going to supply the industry with dried flower. And demand for weed was expected to go through the roof.
While 2019 was a tough year for some pot stocks, 2020 is shaping up to be much better. Not all pot stocks are created equal though. One area that looks like it’s poised to outstrip the broader weed stock market is cannabis extraction stocks.
In 2019, global pot sales soared 48% year-over-year to $15.0 billion. In 2020, marijuana sales are expected to climb 38%. By 2024, global weed sales are projected to top $43.0 billion. (Source: “Global Cannabis Sales Grow 48% to $15 Billion in 2019,” BDS Analytics, January 16, 2020.)
A compound annual growth rate of 23% is pretty hard to dismiss.
Legal marijuana is a young industry that is providing investors with a lot of choices. In addition to the marijuana producers, there are companies that serve or support those producers—with elements such as hydroponics, processing, extraction, financing, set-up, e-commerce, and operating dispensaries.
So far, they have mostly been serving the relatively small Canadian market (Canada has a population less than that of California)—one that, as of September 2019, had yet to generate $1.0 billion in annual legal pot sales. (Source: “The Retail Cannabis Market in Canada: A Portrait of the First Year,” Statistics Canada, Statistics Canada, December 11, 2019.)
That number will likely jump considerably once the Canadian marijuana market matures. Investors who do not want to wait for that to happen, however, might want to consider cannabis extraction stocks.
Why? Cannabis extraction companies are at the center of the hottest trend to hit the legal cannabis industry in years: marijuana derivatives. Those include cannabis-infused products like edibles, vapes, concentrates, beverages, tinctures, and topicals.
Cannabis-Infused Products Are Crucial for the Pot Industry
Cannabis-infused products are opening up a whole new revenue stream for the legal marijuana industry. That’s because these items are being introduced to consumers who may have been reluctant to try traditional cannabis products. Some people like the buzz or the medicinal properties but don’t want to inhale smoke.
A few years ago, in the U.S., roughly 75% of the marijuana market was taken up by cannabis flower. Today that number is around 40%. A similar trend has been happening in Canada. (Source: “Why Business Is Booming for Cannabis Extraction Companies Despite the Supply Shortage,” Financial Post, April 19, 2019.)
That is a godsend for marijuana companies looking to juice their top and bottom lines. That’s because cannabis-infused products have higher margins than traditional dried cannabis does.
Providing products that have high demand and a high profit margin is a no-brainer.
Cannabis Extract Industry Will Be Huge
In January 2020, cannabis-infused products legally hit store shelves in Canada for the first time. That came just a year after the Canadian government approved the sale of recreational marijuana in the form of dried flower, oils, and sprays.
The cannabis extraction industry will be massive, because the sales projections for pot-infused products are huge.
According to one study, the total legal marijuana market in Canada will reach $11.0 billion by 2025. Of that, 54% is expected to come from sales of edibles and other cannabis-extract products. (Source: “One-in-five Canadians will consume cannabis in 2025: Ernst & Young,” Yahoo! Finance Canada, March 26, 2019.)
And that’s just for Canada; the global market for cannabis derivatives is expected to nearly double over the next five or six years to $194.0 billion. (Source: “Canada’s consumer market for edibles estimated to reach at least $1.6 billion annually: Deloitte,” The GrowthOp, June 3, 2019.)
Now, many cannabis companies do not have in-house extraction facilities. To make marijuana-infused products, they need to outsource the work. That’s where cannabis extraction companies come into play.
Instead of growing marijuana, they take hemp and cannabis biomass and process it for the resins, concentrates, distillates, and targeted cannabinoids.
Admittedly, some of the bigger licensed marijuana growers in Canada already have—or are constructing—their own extraction facilities, but it won’t be enough to meet the future demand for cannabis oils.
In fact, some cannabis growers have signed multi-year, renewable extraction agreements with the bigger cannabis extraction companies in Canada.
Cannabis extraction stocks could be a huge profit opportunity for marijuana investors. Marijuana-infused products became legal in Canada at the start of 2020, and the industry is expected to experience double-digit growth over the coming years.
Thanks to higher margins, more and more companies are looking to produce cannabis-infused products. If marijuana-derivative products sell well, cannabis extract stocks should rise in value.