This Week in Cannabis Investing: Weed Legalization in Germany Could Trigger Changes Across Europe

Steps being taken for weed legalization in Germany could clear the path for more European countries to embrace recreational cannabis use.

EU flag superimposed over marijuana leaf
(Image credit: Getty Images)

The legalization and commercialization of cannabis, adult-use and medical, continues with many more projected years of double-digit growth – and weed legalization in Germany could be next. 

Last month, the ruling coalition in Germany released a blueprint for establishing Europe's first taxed and regulated adult-use market. As Germany inches towards cannabis legalization, this could spell big changes for the rest of Europe. Several European Union (EU) countries, including Greece, Italy and France, have legalized medical marijuana and are considering broader legalization measures.  

"It's a huge moment," Niklas Kouparanis, CEO of German cannabis company Bloomwell Group, told Politico. "Germany is basically pioneering the way to legalize cannabis for other EU member states." 

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The U.S. is the largest addressable cannabis market, but we continue to see how the rest of the world is progressing. European countries remind us of how the U.S. industry has evolved over time, with each state deriving its own industry with unique traits. Europe shares some of those similarities but with a more conservative approach to cannabis access for its constituents. 

We have been keen to see how European retail and medical dispensary licensing scales. Retail growth, along with medical recommendations and prescriptions, will be critical for industry growth in these countries. There's been plenty of pitch decks, but very few have built or obtained licenses for retail locations or medical clinics – an aspect to watch as Europe seems to be in a challenging economic situation.

Illegal Cannabis Sellers Are Flocking to Instagram

Illicit cannabis continues to be a robust and illegal trade as access to legal cannabis remains constrained by federal policymakers. Instagram and other social media sites are becoming popular vehicles for illegal marijuana sales, and according to 2021 data from Pew Research Center, 71% of people ages 18 to 29 use Instagram. Illicit sellers also reported using Snapchat, Discord and Telegram to market products to new and existing consumers. 

It is frustrating to see the illicit industry get stronger while many people like us work daily to have a healthy and thriving legal cannabis industry. Bad actors in the illegal market can affect legal operators, even on simple things like social media marketing. We have seen countless legal cannabis companies lose their social media accounts while illegal sellers continue to post. Consequently, we've seen the shuttering of accounts from licensed operators complying with social media rules versus those acting with bad intentions. 

There are tools for legal operators to help them stay above the fray, such as Highlyte by Amnesia Media, a company where Poseidon has invested. Let's hope as legal markets become more sophisticated that it becomes easier to identify and shut down illicit operations on social media while allowing legitimate businesses to prosper.

Cannabis Companies Pivot to Alcohol and Sports Drinks Investments

Several of the world's largest cannabis companies are pivoting to other arenas like beer and sports drinks. 

In November, the Canadian cannabis company Tilray (TLRY) acquired Montauk Brewing Company, adding to a collection that already includes SweetWater Brewing Company and Breckenridge Distillery.

Canopy Growth (CGC) is the majority owner of BioSteel, a sports-beverage brand with high-profile sponsorship deals including the Toronto Raptors, Dallas Mavericks and Kansas City Chief quarterback Patrick Mahomes.    

Canopy's core cannabis business reported a 27% decrease in revenue compared with the same quarter last year, while income for BioSteel nearly quadrupled. Tilray's cannabis revenue declined 17%, while its alcoholic beverage business saw revenue climb 34%. 

Several Canadian cannabis operators have struggled to succeed in building profitable cannabis operations. These operators have fueled their own mistakes with excessive capital that many industry participants have long forgotten at this point in the cycle. The Canadian cannabis companies have true public market currency as they are able to trade on listed exchanges and have continued to enjoy the benefits of access to capital, including equity. As a result, we see a few Canadian operators who lack vision or a true long-term strategy, attempting to buy their way to profitability by going into non-cannabis industries like beer or other consumer packaged goodss. These teams are nothing like Berkshire Hathaway (BRK.B), so we mostly see this as a distraction from the real issues. 

We would not be surprised to see one or a few of these companies emerge as winners. It will likely be a company with a strategy and a focus on fundamentals and execution versus one quoting the number of shares their stock trades per day or about U.S. politics that have little to no bearing on their international cannabis business.

New York's Illicit Market Sells Concerning Cannabis Products

 A study sponsored by the New York Medical Cannabis Industry Association revealed that unlicensed cannabis products purchased in New York stores consistently failed lab tests for purity and potency. Researchers found that countless illegal stores in NYC are advertising sales for THC products.   

"The presence of several harmful contaminants, such as E. coli, pesticides, heavy metals, and salmonella in 40 percent of the illegal products purchased, including vapes," the report stated. "Many of the products tested did not contain the amount of THC advertised on the label and in one case, featured double the amount of listed THC. After reviewing the items under the state's proposed branding regulations, 100 percent of the products failed."

As longtime industry participants, we have seen numerous issues coming out of the illicit market in cannabis. The findings in recent studies are unsurprising because the illicit market is not regulated, nor does it seem to care about what they are pushing into the market and to whom or how old. This couldn't be more different for the overly regulated and taxed legal industry.

Team Poseidon was in NYC this fall, touring legal retailers in New Jersey, and we witnessed several illegal doors that litter the Manhattan market. The illicit market in NYC is extremely brazen and continues to be so. With our product knowledge, it was clear to see how terrible the available illicit products were, but there are millions of people that are still cannabis curious and are not savvy about what is legal, especially when illegal sellers are so prevalent. We're concerned for the health and safety of unsuspecting consumers and curious when this issue will become more mainstream. Our Cannabis Closing Bell and Poseidon Twitter accounts have regularly cautioned people about the dangers of the illicit market and we welcome the opportunity to say once more, "Buying legal cannabis is the patriotic thing to do!"

Morgan Paxhia
Contributing Writer

Morgan Paxhia is Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only.  Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.