Piper Sandler's Michael Lavery Shares Cannabis Industry Projections, Names 'The Real Key Catalyst To Watch'

The U.S. cannabis market has the potential to reach $115 billion by 2030, while last year regulated sales in the country have hit $17.5 billion, according to Michael Lavery, a director and senior research analyst covering consumer staples and cannabis for Piper Sandler.

“Stating the kind of obvious, the U.S. market is certainly significant,” he said during his education session at this week’s Benzinga Cannabis Capital Conference, Oct. 14-15 in New York City at the Marriott Marquis Hotel.

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More Modest Progress More Likely

The forward look depends on things like broader legalization both across other states and also at the federal level.

Nevertheless, even without federal legalization, 2030 cannabis sales could still be above $50 billion, considering that even “mature” states like Colorado and Oregon are still experiencing sales growth of 10%-15% this year, the analyst explained.

“We think the federal regulatory change is the real key catalyst to watch.”

Aside from the regulatory changes, it is wise to keep an eye on pricing, as that also directly impacts sales, he told the Benzinga conference.

Considering the fact that Senate passage still requires 60 votes and that a far-reaching reform does not yet have even 50 votes, Lavery said more modest progress is likely. Senators Tester and Shaheen have spoken openly against Senate Minority Leader Chuck Schumer’s bill and full legalization, the analyst said.

Among the interesting components of the bill Schumer proposed, Lavery highlights regulation from the FDA, which he said could be very complicated in ways that many people don’t realize.

Another important part of the bill includes social equity initiatives, which Lavery said may make some room for momentum at least.

Scarcity Driving Cannabis Value

The analyst further pointed out how branding often drives pricing power, seeing that the premium price products are the ones with brands.

“In this space now it's really scarcity that's driving the value and we see that in every market.”

There’s been more segmentation between premium and value brands, with value brands obtaining a lot of momentum over the last year-and-a-half or two, the analyst explained.

U.S. pricing dynamics depend on a state-by-state regulations, with limited licensing states and their relative scarcity of the product generally having higher prices. On the other side, states without licensing caps face more competition and downward pricing pressure.

The flipside is that lower pricing often tends to increase the competition, and improve the market share gains, relative to illicit trade or from illicit trade.

Three Ways Of Branding

While brand equity has traditionally driven pricing power in consumer packaged goods, in cannabis this is a new category, or as Lavery points out — no meaningful brand equity yet exists in this industry. The analyst proposes a few different ways brands in the category could evolve, including:

Branding like wine – little true brand equity, more of consumers being driven by varietals;
Branding like beer – large brands differentiated by brand equity and small craft brands by beer style;
Branding like tobacco – high brand loyalty with less product differentiation.

'Three Buckets' Of Cannabis Stocks

Back to the regulation, Lavery highlighted that interstate commerce is inevitable, although is unclear how it would be shaped.

More and more Canadian companies are eager to reach the U.S., with some of them considering buying facilities that they’ll leave empty until it’s time to get the green light.

Just this week, Canopy Growth CGC spent $297.5 million to acquire the right to buy Wana Brands, the No. 1 selling edibles brand in the U.S.

Earlier this year Tilray TLRY merged with Aphria, which has the Sweetwater brand, and these are just two examples.

Lavery divides the stocks Piper Sandler follows and covers in “three buckets”:

The U.S. MSOs, among which he favors – Green Thumb Industries GTBIF and Cresco Labs CRLBF;
The Canadian LPs, among which he highlights Aurora ACB, Cronos CRON, Tilray TLRY, and Canopy Growth CGC;
CBD players, with Charlottes’ Web CWBHF as an example.