Cannabis: $75B Opportunity; Category Cross-Currents Keep Us Cautious On Booze

We expect cannabis sales of ~$75 bn by 2030, supported by new analysis on category retention gaps and population-weighted, state-based analysis on cannabis first use and binge drinking (where cannabis access points to more cannabis trial and use, and less binge drinking, and an opioid solution). Maintain Outperform on KSHB, WEED, & LEAF; and remain cautious on big beer, including TAP.
Bottom Line
Ahead of our 2nd Annual Cannabis Summit, we revise up our cannabis market target by $25 bn, as we now look for the industry to generate $75 bn in sales by 2030 (vs. $50 bn by 2026 previously). Underpinning this estimate is proprietary analysis on binge drinking behavior, as well as the role that legal cannabis access has in terms of driving trial (measured by cannabis first use rates for 18+ consumers). This work builds on our prior assertions that cannabis acts as a substitute social lubricant for consumers. We believe this is the first time detailed state-level binge drinking statistics have been analyzed and juxtaposed against cannabis use, where we found that legal cannabis states (as of 2016) binge drink 13% fewer times per month than non-cannabis states.
What’s New
We now expect the category to generate ~$75 billion in gross sales by 2030 (up from $50 bn by 2026). This new forecast reflects:
Stock Implications
We remain Outperform rated on the three cannabis companies under our coverage: KSHB, WEED, and LEAF. While this report focuses on the U.S. and has direct implications for KSHB, the trends that we’ve historically seen for cannabis in the U.S. tend to be mirrored in Canada, building on our conviction around the cannabis opportunity for WEED and LEAF as the Canadian market expands to adult use later in 2018. Meanwhile, our extensive analysis on the impact that legal cannabis access can have on overall drinking patterns reinforces our conviction that cannabis and alcohol are substitute products. We believe that lower-end beer is most exposed to this substitution risk, such that we remain cautious on Market Perform-rated TAP.
What to Watch
Growing consumer support for legal cannabis, and increased access, looks to be driving meaningful change at the state level. We expect to see ballot initiatives to legalize cannabis for adult use in both Michigan and Illinois in the upcoming November election. As well, a number of states are looking at expanding cannabis access (both medical and adult use) via the legislative and executive branches (with New Jersey the most likely in 2019). Expanded access to Maine, Massachusetts and New Jersey could prompt other states in the Northeast to make changes.
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