Despite projections pointing towards short-term capital market struggles fueled by stalled reform, most in the cannabis industry remain optimistic that the market and regulations will align to provide a beneficial long-term.
Short-term Market and Regulatory Struggles Don’t Dampen Optimism
Robert Beasley, CEO of multistate medical dispensary brand Fluent (CSE:TIUM), said the short-term market downturn is the latest iteration of the enthusiasm-gloom cycle as legalization progresses.
Noting that passage of legislation like SAFE Banking would help improve the market, Beasley added that the most significant boost would come from President Biden following through on a commitment to decriminalize cannabis.
"Despite all of this, the industry continues to grow at a vibrant pace––sales are increasing as new patients recognize the value of cannabis," he said.
Morgan Paxhia, co-founder and managing director at Poseidon Asset Management, said the US cannabis market continued to digest the year-over-year boom from the pandemic while highlighting delays in regulations and project developments.
"Pessimism was at a major premium after 10 months of a painful selloff in the space," Paxhia said. "Add in a flattening of growth in the 2nd half of 2021 and the result was further anxiety with constant selling pressure."
Regulatory stalls didn’t help the market either. NORML political director Morgan Fox cited political rancor as a critical sticking point.
"A lot of people are probably losing faith in the ability to get anything past this year," said Fox adding that prospects could worsen if the less-cannabis-friendly GOP takes control of one or both bodies of Congress in the midterms. He acknowledged that younger GOP members do seem to be warming to cannabis.
One such example is first-term South Carolina Senator Nancy Mace, who introduced the States Reform Act in November 2021. Some have viewed the bill as a bipartisan compromise, including a 3% excise tax and steps to address the drug war's harms. The bill has the support of major players, including Amazon.com, Inc. (NASDAQ:AMZN).
February saw cannabis reform vault back into the discussion, as Senate Majority Leader Chuck Schumer said the issue is "a top priority for me."
Fox said Schumer's statements could lead to actual legislation introduced in Senate.
"Then we can really start having substantive conversations in the Senate around policy," said Fox who cautioned that substantial obstruction remains in leaders like Minority Leader Mitch McConnell.
Clark Hill attorney Sander Zagzebski said that despite a relatively weak year for the equity capital markets, he is not concerned about mid-and long-term projections.
He noted December 2021 projections from his firm that forecast the U.S. market reaching an $84 billion market value by 2026. Zagzebski added that a lack of political action in Washington, D.C. had shocked some.
"The lack of progress in advancing legislative reforms at the federal level surprised a lot of people because the industry started the year last year with such high hopes," he said.
Leadership at The People's Ecosystem, a financial and business support organization for minority cannabis owners, also sees the market moving in a positive direction.
Melanie Davis, COO and managed services director believes that short-term negative projections may stem from "over-capitalized multistate operators that may not have a diverse ecosystem or a genuine connection to cannabis culture and its people."
MSOs calling for enforcement rather than working with the legacy market also hinder market growth said the company's director of strategic initiatives Frederika McClary Easley.
"Until the legacy market gets the respect it deserves, and the transition of its operators prioritized, the sustainability and growth of the regulated market will be questionable."
Will MSOs Thrive During Downturn?
According to most sources, the market's hardships are likely to be momentary. For certain MSOs, they believe that the projected short-term will serve as a time of growth as they benefit from market consolidation.
Fluent's Beasley agreed. "The continuing status of the industry as a limited and 'illegal' industry prevents outside investment and promotes the internal consolidation from existing players."
Clark Hill's Zagzebski added that success would come to MSOs that "take advantage of the sector's overall weakness and general pessimism to consolidate with strategic acquisitions," noting that companies with access to less dilutive debt to fund M&A are best positioned to succeed.
Poseidon’s Paxhia offered a similar take, telling Benzinga, "We expect those that have properly positioned their trajectories fundamentally and with analysts are in a better position to meet/exceed numbers."
Some note that it is far from certain that MSOs will become the dominant players when the market reaches its full potential.
"People are making all sorts of assumptions that may not play out," said Eric Berlin, a cannabis attorney for Dentons.
He believes that those projecting MSO market supremacy may be overlooking existing top brands or outside players that could take over. Still, Berlin sees a future where MSOs have a significant market share.
"There are all sorts of ways of going to market, some of which are being somewhat neglected," said Berlin, noting that some methods may prove more beneficial than MSOs as the market solidifies in time.
