The cannabis industry is booming, with the market valued at over $10 billion. The legal recreational marijuana space has been experiencing explosive growth this past year, but despite the rapid rise in demand that’s accompanied it there are some growing concerns about sustainability and safety for consumers.

The “what does hexo do” is a threat that has been looming over the cannabis industry for some time. It is becoming increasingly clear that this threat could be much more significant than previously thought, and may even spell the end of the cannabis industry in its current form.

On Oct. 17, 2018, Canada became the third country in the world to legalize recreational marijuana. Due to the new sector of the market opening up, marijuana producers in the nation were producing high growth figures in the early phases (previously, only medical marijuana had been legal). Fast forward to now, and top businesses like Hexo (NASDAQ:HEXO) have struggled to maintain regular quarterly growth.

The function of the artisan cannabis grower is one of the most important reasons. Smaller businesses that concentrate on quality have been able to keep the sector from being dominated by the bigger manufacturers. They’ve become thorns in the sides of the larger players, who may be underestimating the danger.

Two people working in a greenhouse.

GETTY IMAGES is the source of this image.

Several corporations recognize smaller manufacturers, although they are unconcerned about them at this time.

Hexo’s third-quarter results (for the period ending April 30) were announced in June, and its revenue of 22.7 million Canadian dollars was down 31% from the second quarter’s sales of CA$32.9 million. CEO Sebastien St. Louis said that several new cannabis strains were of lesser quality than anticipated, which allowed smaller producers to gain market share, adding that “craft has completely shocked us.” He does think, though, that the business can consistently create superior goods than artisan farmers.

Hexo isn’t the only business that has had to deal with issues related to craftsmanship. Tilray (NASDAQ:TLRY), Canada’s biggest cannabis business, released its latest financial results in October. While Tilray’s sales increased 43 percent year over year to $168 million for the quarter ended Aug. 31, owing largely to the merger with marijuana producer Aphria, which closed in May and whose results are now included in Tilray’s overall tally, it also faced competition from smaller producers, which CEO Irwin Simon dismissively referred to as “ankle biters.” Tilray aims for a 30 percent market share in the Canadian marijuana industry, while experts think it will be closer to 12 percent today.

Ignoring the danger may cost you a lot of money.

Since legalization, Canadian marijuana stocks have been suffering, owing to the disappointing results that manufacturers have been producing:

 

^SPX Chart

SPX DATA FROM YCHARTS

There are 776 marijuana growers in the nation as of the three-year mark, and oversupply remains an issue in the sector. And if businesses like Hexo and Tilray don’t take the danger seriously, they may end up with even worse outcomes in the future.

What are the options for investors?

Because big multi-state operations in the United States are still in their early phases of development, the position of craft producers isn’t causing them any concern. The market in Canada, on the other hand, is far beyond that stage. The market isn’t brand new, and strong sales growth isn’t a given; there’s a lot of competition, and businesses must compete for market share. Craft may play a major part in the American market as well, but for the time being, there are plenty of development possibilities there as more states open up for business.

Avoiding companies like Tilray that have ultra-aggressive growth targets (aiming to hit $4 billion in revenue by 2024) and where quality may not be a top priority — and given the CEO’s comments calling the competition “ankle biters,” that only adds to concerns that craft isn’t being taken seriously — is one way investors can reduce their risks in the sector. 

There is still a lot of danger in the industry. For the time being, however, cannabis investors should concentrate their efforts on marijuana businesses that are profitable and, at the very least, report reasonable margins on their goods, implying that quality is a priority (as opposed to low-quality products that would be cheaper in price).

The “hexo news 2020” is a blog post by Hexo CEO, Jonathan Zobel. In the article, he talks about how cannabis producers could be making a colossal mistake in dismissing this threat.

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