KEY POINTS

  • Earlier this week, marijuana stocks rallied alongside the rest of the stock market.
  • The stock market took another dive on Wednesday, and weed stocks followed.
  • Congress is attempting to keep a prohibition on marijuana edibles to safeguard children from drugs.

What’s going on with weed stocks?

Wednesday was a rough day for marijuana investors, as the early week market rally lost strength and weed stocks dropped. At the market’s closing, Canopy Growth (NASDAQ:CGC) was down by 2.23%, Aurora Cannabis (NASDAQ:ACB) was down 3.12%, while Tilray Brands (NASDAQ:TLRY) suffered a minor loss of 0.67%. Earlier in the day, Canopy and Aurora dropped approximately 5.5%, and Tilray dipped 3.5% before their slight rebound at the end of the day.

The recent sell-off among marijuana stocks is likely due, at least in part, to the stock market downturn today. However, it’s also possible that these companies have unique problems.

Why we care

A bill is currently in Congress to legalize marijuana throughout the nation. There are some complications, such as President Joe Biden’s opposition to the idea. However, for the most part, even conservative legislators seem in favor of legalization. There are, however, some forms of legalization they may not support – namely edibles.

According to Marijuana Moment’s report from yesterday, the House Republican Study Committee (about 35% of Congress) released a study that blames state-level marijuana legalization for “an explosion of marijuana use among children.”

In case marijuana prohibition is lifted, the RSC advised that products in the “form of candy or beverages” made from marijuana should be prohibited if there is “reasonable cause to believe” they will be available to minors. Similarly, according to a business website, approximately a quarter of US Senate members favour passing the Protecting Kids from Candy-Flavored Drugs Act.

What now

There’s a good reason why marijuana investors should be concerned. According to a Grizzle study from 2018, while the entire sector is a product with high gross profit margins (if not high net margins), edibles are by far the most profitable form of retail cannabis. For example, gross margins on dried marijuana flower were 76% in 2018, cannabis extract 84%, and edibles 92% that year.

Although the numbers are outdated, they may still provide some insight. According to Statista, the cost of dried cannabis decreased significantly from $1.79 per gram to $1.04 per gram. However, if other conditions remain stable, this shouldn’t change how profitable one type of retail marijuana is over another. Therefore, it appears that Congress intends to ban the sale of the most profitable form, even if other forms become legal.

The natural consequence of such a shift would be to reduce gross profit margins for large marijuana firms like Canopy, Aurora, and Tilray. This implies that, even if cannabis is legal at the federal level, Congress may maintain a restriction on edibles sales. That could prevent or delay marijuana companies from becoming profitable.

In other words, at the point when marijuana investors are seeing a glimmer of hope for legalization. Congress may snatch defeat out of the jaws of victory. Thus, they may ensure that marijuana remains an unprofitable industry for years to come.

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