Constellation Brands (STZ -0.70%) shook up the cannabis industry when, in 2017, the beer maker invested in marijuana producer Canopy Growth (CGC -2.11%). Since then, it has invested billions more in the company. Budweiser maker Anheuser-Busch InBev has also shown interest in the industry, as have other companies.
The cannabis industry is in its early growth stages, and it may only be a matter of time before more money pours into it from the big beer companies.
Are consumers swapping beer for cannabis?
It has been more than four years since Canada legalized marijuana. And a recent study shows that there is a negative correlation between revenue from medical marijuana and alcohol. The data goes up until 2018, so it doesn't factor in the recreational market. But it did show that for a dollar of medical marijuana sold, alcohol revenue, on average, declined between 74 and 84 cents. In a separate study involving Washington state, researchers found that legalizing marijuana resulted in alcohol sales declining by 15%.
Cannabis, like alcohol, is a recreational product that can be popular in social settings. And with cannabis-infused beverages rising in popularity and offering people a way to obtain a buzz without a hangover the next day, the products could inevitably become more of a substitute as the industry grows. Researchers from Fortune Business Insights project that the global cannabis beverage market could be worth more than $19 billion in 2028, expanding at a compound annual growth rate (CAGR) of more than 54% until then. However, that's still a drop in the bucket compared to the global beer market, which will be worth just under $990 billion by then -- although it is growing at a CAGR of less than 4%.
For a growth-oriented business like Constellation, the opportunities are proving to be too alluring to pass up.
Constellation Brands is sticking by its investment
Although Canopy Growth has routinely incurred hefty losses (over the trailing 12 months, its net losses total nearly 3 billion Canadian dollars), Constellation Brands doesn't look to be giving up on cannabis just yet. CEO Bill Newlands expressed disappointment in Canopy Growth's recent results on the company's earnings call in October. However, he noted, "it is not indicative of a significant long-term market opportunity that still exists for the legal cannabis market."
Constellation could undoubtedly use a catalyst for the long term, as its sales growth has averaged a modest rate of just over 5% in the past five years.
Data by YCharts.
A big opportunity could arise if the U.S. legalizes marijuana, as that would allow Canopy Growth to enter the U.S. market, which currently remains off-limits for the Canadian-based marijuana company due to the illegality of marijuana.
While multi-state operators (MSOs) sell cannabis in the U.S., they cannot trade on a major exchange as they violate federal laws. This explains why many beer companies are likely waiting on the sidelines for now, as the primary option at this point is to invest in Canadian-based marijuana businesses that are unprofitable due to a highly competitive market. And investing in a U.S.-based MSO is a nonstarter as it would jeopardize a company's listing on an exchange, which, in turn, could devastate its share price.
Should you invest in pot stocks or beer stocks?
I wouldn't suggest trying to guess which beer maker could be the next one to jump into the cannabis industry. But one thing's for sure: There's interest. Anheuser-Busch previously linked up with Tilray Brands in a partnership to research cannabis beverages (it has since ended). The Boston Beer Company, the maker of Samuel Adams, hasn't partnered with a company, but earlier this year, it announced the launch of cannabis-infused iced teas in Canada under the name TeaPot.
Some big beer companies are circling the industry, but rather than investing in them, investors may be better off buying shares of MSOs, which could be prime targets for the big beer makers if and when marijuana legalization takes place. A company such as Curaleaf Holdings, which has a presence in 22 states and generates more than $1 billion in annual revenue, could be a coveted partner. However, with the business still struggling with profitability, there is some risk with the cannabis stock. But for investors willing to buy and hold, it could be a promising long-term opportunity for investors looking to cash in from the industry's growth potential.
