Cannabis Outlook Affected by Federal, State Views

Note: This video is part of Morningstar Canada's Cannabis Week Special Report.

Ruth Saldanha: Despite a conflicted regulatory environment, the U.S. is the fastest growing cannabis market in the world. Morningstar equity analyst Kristoffer Inton finds and expects that by 2030, the market will be 10 times larger than it is today.

Kris, though individual states have legalized cannabis, at the federal level it is still illegal. How does this impact your view?

Kristoffer Inton: The illegality actually has hampered growth in our view. There's a couple of reasons for that. One, you see a lot of potential capital that otherwise would see this huge growth market as an opportunity sit on the sidelines. A lot of businesses that are operating federally--they just don't want to have to deal with figuring out the legality of it as long as it remains illegal at the federal level.

Secondly, there's barriers that hamper a lot of the existing operating cannabis companies. For example, they face challenges when filing taxes where they are not allowed to deduct depreciation. So, they are paying effective taxes that are much higher than a typical business would be. I think that there's different challenges that have hampered the growth of the market.

I think that when you have a clearer picture on the federal level, not only will those barriers be removed, but I think then what you've seen so far is that companies are operating sort of on a state-by-state basis. The legality or a change in the legality at the federal level will allow more nationalization of operations.

Saldanha: Having said that, you are still bullish on the U.S. market. Why is that?

Inton: I think that the U.S., when you look at the consumption data of cannabis, whether it's illegally or legally, it's some of the highest in the world. I think the opportunity is there. People are consuming cannabis, whether it's legal or not. I think when the governments legalize and expand enough distribution and the access is there that the consumers that are already consuming anyway, would convert into the legal market. I think on top of that: What you saw in states like Colorado--after legalization, participation rates actually rose. So, what that means is that nonconsumers that would never use cannabis when it was illegal, when it became legal, they actually start considering consuming cannabis. I think that there's growth that would stem from both of those.

Saldanha: Thank you, Kris. Tomorrow we will talk about M&A trends in cannabis, the ESG impact, and companies to watch for.

For Morningstar, I'm Ruth Saldanha.