Is the CBD bubble about to burst?

Is the CBD bubble about to burst?

Cannabis stocks have exploded over the past twelve months, surging substantially in hope that the United States will soon legalise cannabis on a federal level.

But for now, the law
surrounding the plant remains ambiguous, which could suggest the recent market
rally is more of a speculative hype-driven bubble as opposed to organic market
growth.

A stock market bubble is defined as an economic cycle characterised by the rapid escalation and
subsequent deflation after a set of similar stocks are driven above their value
in relation to their rational value. When investors heed in purchasing at the
new elevated price, a huge sell-off occurs, causing the bubble to deflate.

The
first-recorded example of a speculative bubble occurred in the Netherlands in
the 17th century. It is commonly labelled as ‘Tulip Mania’ as it saw
the price of tulips skyrocket to above its expected value before dramatically
crashing in the space of seven months.

The
cannabis stock bubble could blame the vast inflation it has experienced on
over-estimates about the future forecasts of the industry, with some estimates ranging from $500 billion to $1 trillion, with
the realistic range most probably around the $150 billion mark predicted for 2029.

Aurora Cannabis (ACB) rose by 125% from the turn of the year to March, but it has since
dropped by 45%, indicating that the optimism that once fuelled the market is
beginning to wane.

Aurora
Cannabis looked set on creating a deal with Coca Cola (KO), which would have
seen a boost in investor interest within the industry, however the CEO Terry
Booth stated recently that the company focus was not on the
beverage market due to limited success of cannabis beverages already available
on the market.

Despite the demand for such beverages, several large-scale brands are still worried about the stigma of getting involved with cannabis and the potential of damage reaching their mainstream image.

Charlotte’s Web

Charlotte’s
Web (CWBHF), on the other hand, has defied the sceptics by preserving its
early-year gains of 125% despite suffering a minor blip in June.

Charlotte’s Web has seemingly taken full
advantage of the new lenient hemp laws introduced by increasing their
production and expanding into more than 8,000 retail locations including major chains such
as CVS Health and others across the US.

The
company planted 862 acres of hemp during the 2019 growing
season in order to meet growing demand, representing a 187% increase since
2018.

Producing
a variety of wellness-based products containing hemp-based CBD with offerings
of oils, gummies, capsules and even pet products, the company leads the market
by far in terms of market cap.

It seems
as though CBD companies are finding it easier to achieve success within the
markets over cannabis-based companies. This may be due to the 2018 Farming Bill, which gave investors solid confidence to
venture into these markets over the unpredictable cannabis industry and the
legal uncertainty that surrounds it.

But as
stocks look delicately poised over the coming months, what are the fundamental
issues driving this infant market?

Laws
and regulation

The FDA’s
categorisation of CBD products will be a key indicator for traders looking to
capitalise on pot stocks over the next few months. The food regulator has been
seeking comments from industry professionals and will release guidance before
the end of the year.

As for
cannabis, it is currently legal in Colorado, Washington State and California
among others, with states such as Texas moving towards decriminalisation.  

The
federal stance on the plant still seems fairly strict, with citizens getting
stopped at the border and banned from entering the country just for carrying
medicinal CBD.

Uncertainty
in legal frameworks drives volatility in the markets – one statement from a
government or senate official could be catastrophic, or groundbreaking for
cannabis-related companies.

Celebrity
Endorsement 

Celebrities
have hopped on the CBD bandwagon over the past year, Kim Kardashian hosted a
CBD themed party for her daughter while the likes of Jennifer Aniston and Oprah
Winfrey have also endorsed their own favourite products.

While it
might seem irrelevant to the markets, celebrities actually have a huge
influence on the price of stocks, via influencing their army of followers on
their opinions of certain companies.

Kim
Kardashian’s sister, Kylie Jenner, tweeted negatively about Snapchat, prompting the
company to lose $1.3 billion in market cap in a day. It has struggled to
recover ever since.

Jenner
simply wrote a tweet asking ‘Sooo does anyone else not open Snapchat anymore?
Or is it just me… ugh this is so sad.’ Subsequently, this caused a massive
haemorrhaging of users from the popular app, with many deleting Snapchat
completely off their devices.

It’s been
reported that short sellers made more than $1 billion
betting on the stock’s slide after the infamous tweet.

Future
for the market

Many
large investors and companies with involvement in the industry are most likely
waiting for the huge market to mature and see consolidation take place before
making solid assumptions about the future of cannabis markets.

To help
drive the market further, giant conglomerate consumer companies such as
Coca-Cola (KO) and Walmart (WMT) could invest more in the sector, though
they’ll probably wait for legalisation before confidently joining the business.

Another
challenging factor can be the informative battle which comes with marketing CBD
products, with a number of companies being scrutinised for incorrectly
labelling products and aggressive marketing tactics.

Currently,
many in the industry feel like they’re fighting an uphill battle as they try to
slide the reputation of hemp and CBD away from pot smoking hippies, while
trying to convince medical professionals and interested citizens about the
beneficial aspects of CBD and how its different from the commonly known
cannabis.

If
regulators decide to clamp down on the industry, we could see signs of the
cannabis bubble beginning to pop, but for now optimism is on the up and
endorsement is at an all-time high, so it’s logical to think that cannabis will
continue to surge in the coming years as the market begins to mature.


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