Marijuana IPO Lessons
With the marijuana industry getting larger and growing several multi-billion-dollar companies, many investors are trying to find where the next big growth stocks will come from within the pot market.
With marijuana planting firm roots in the Canadian market (where most of the major pot stocks operate), the expansion of pot across the world is going to see a whole new set of pot stocks hit the markets in an attempt to equal the gains seen by the Canadian stocks. Enter marijuana initial public offerings (IPOs).
While the beginning of the marijuana industry saw many companies issue IPOs to great success, a new wave of them is likely to come as the industry continues to mature. We could be flooded with marijuana IPOs if the U.S. federally legalizes marijuana in the near future, which is a very real possibility.
And that leads us to some valuable lessons that we can learn in preparation for these marijuana IPOs, both from inside and outside the industry.
Tech IPOs Show What Not to Do
One of the industries that often sees comparison with marijuana is technology. They both offer huge growth potential, are both heavily dependent on politics (whether you’re looking at ride-sharing apps rewriting taxi laws or social media companies working through privacy issues), and are both famous for extremely rapid growth.
What we can learn from tech IPOs as they relate to marijuana, then, is that too much hype can often sink an IPO before it even leaves the gate.
The most recent major tech IPOs, Lyft Inc (NASDAQ:LYFT) and Uber Technologies Inc (NYSE:UBER), both came with a colossal amount of excitement.
Uber, specifically, had one of the highest valuations of all time before it hit the public markets with a initial valuation of about $120.0 billion. Analysts, however, dramatically overestimated Uber’s value on the public market, and the company ended up issuing an IPO at a valuation of $70.0 billion. (Source: “Why Silicon Valley Loved Uber More Than Everyone Else,” The Atlantic, May 24, 2019.)
The issue here is that analysts were blinded by their own excitement and belief in the company that they were unable to see how the broader investor market would treat the company.
While both Lyft and Uber have since recovered from their poor IPOs, the companies are still down 20% and seven percent, respectively. That’s a very bad showing for what were some of the most highly anticipated IPOs of the year.
But they do serve as an important lesson: there’s a huge gulf between what an analyst will value a company at and what everyday investors will buy in at. We saw this play out in the marijuana sector, with many companies seeing huge growth post-IPO.
In the case of the two aforementioned tech IPOs, however, they were victims of being caught in an echo chamber that lead to too-high pricing and the resultant share downfall.
Marijuana IPOs: Past and Present
I can’t finish without mentioning the most famous recent marijuana IPO, Tilray Inc (NASDAQ:TLRY). The stock went public last summer on the Nasdaq and was the first marijuana stock to do so.
The buzz surrounding the company was massive, but not nearly massive enough. We saw over 1,000% gains in the early weeks following Tilray stock’s entry onto the public market.
But from there, things went south.
Chart courtesy of StockCharts.com
As can be seen in the chart above, TLRY stock has been plummeting after its initial support wore off, with huge declines hitting the share prices since late 2018, a very high decline when compared to companies of a similar size above.
The decline came about largely due to a lack of support from analysts but a huge onrush of thirsty investors.
In this case, analysts had been calling many companies in the marijuana industry overvalued and were concerned that businesses in this space were growing too big for their britches, especially considering that marijuana legalization seemed fairly far off in most countries not named Canada.
But that was a clear misreading of the market and lead to a huge wave of support that, in a case of a self-fulfilling prophecy, did send share prices far too high.
Having said all that, investors who bought Tilray stock on day one are still likely going to see huge gains and have already more than doubled the value of their investment, even with the long decline.
The lesson, then, is that bearish analysts can lead to huge rewards for early investors, but getting caught up in a blind rush can be harmful to your portfolio.
Marijuana IPOs are going to come back, hot and fast. And savvy investors will be able to make a lot of money off of them.
The key is to watch analysts closely—not so much for their predictions, but instead for the overall mood. Judging that, a smart investment in the right initial public offering can yield huge gains.