Speculation continues to abound these days with regard to the impact of the political environment on cannabis in the United States. Whether the conversation centers around the potential Secure And Fair Enforcement (SAFE) Banking Act, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, or the general social media hype on cannabis legalization or decriminalization, each tidbit of unverified information appears to be influencing investors’ decisions to purchase stock in cannabis companies. As seen recently through the impact of social media platforms like Reddit, and mainstream media jumping on the social media bandwagon, the influence of social media on investors’ buying habits can’t be discounted. However, as a certified public accountant dedicated to the cannabis industry, I can’t help but look to the actual financial results, tax revenue, and regulatory environments to discount much of what is being speculated as to where the industry will go in the next few years. While anyone can hypothesize as to what may happen in the future with a Democratic controlled government, one cannot discount the influence, regulatory environment, and the state tax revenue generated by a state-legal cannabis structure on the bigger impact on the industry. So as I look into my crystal ball, which is full of actual cannabis company reported data, here are my short-term key predictions for the future of the cannabis industry:
Decriminalization or Legalization Is Likely to Occur:
Through the passage of both the SAFE Banking Act and the MORE Act, passed by the Democratic controlled house in the past, it is likely that there will be more traction with these bills in a Democratic controlled Senate, making them likely to appear for signature on the desk of President Biden. Related to both public and private cannabis company operations, these bills will assist cannabis companies in a few significant ways that will help ultimately with cash flow in the earlier stages of this industry:
Mass Interstate Commerce is NOT Likely to Occur:
Speculators seem to believe that once there is some measure of Federal legality or decriminalization that floodgates for interstate commerce will open and that large corporate conglomerates are likely to emerge to dominate the industry. There is also belief that cannabis, which can be grown in favorable outdoor climates in less expensive states (California or Oregon), will make its way into markets less favorable for outdoor grow which will bring the prices down in the industry and set up some states as exporters and some as importers. Having worked within the regulatory frameworks of many states, I can’t believe that this is likely to happen. Reasons why I do not see interstate commerce as a mass viable disruptor to the industry is as follows:
Lack of Investor Education:
While all of these predictions are just that, speculative predictions, none of these concepts exist in reality today. Until a law is passed which changes the environment for domestic cannabis companies, there are significant challenges to investors based upon the cash flow generated by these companies. While many companies fare well, many do not. While reported financial results are issued by publicly traded companies, they are adjusted in many instances for the impacts of impairment charges on acquisitions (overpayment for companies), biological adjustments (for inventory valuation adjustments different between US Generally Accepted Accounting Principles (GAAP), and International Financial Reporting Standards (IFRS)), and tax adjustments and tax positions taken in a murky and unclear U.S. tax environment. However, social media hype, media hype, and incomplete messages and information oftentimes fuel the rise of cannabis stocks, which can rise and fall based upon nothing to do with the underlying cash flow or investor return. If a Reddit thread can bolster and destroy the stock of various investments and mainstream companies through social media momentum, it would be a fool’s errand to think that the same isn’t happening with such a volatile, regulated, and unknown industry of cannabis stocks. As a long-term strategy, education is the best option of all.