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Why America's legal weed sales could triple in the next 5 years

Leaders in the cannabis space Aurora (ACB) and Canopy Growth (CGC) both reported disappointing quarterly earnings this week. But Roy Bingham, the CEO and founder of cannabis data firm BDS Analytics, tells Yahoo Finance’s YFi PM that he still projects the U.S. cannabis market to reach $30 billion in the next five years. 

“You hear these massive numbers like a $150 billion or $200 billion market,” Bingham says. “That's the total potential market. Our projection is more like a $30 billion market based upon an actual assessment of how long it takes to roll out the stores and get the regulations approved.”

Total sales of legalized marijuana reached a value of $10.4 billion in the U.S. in 2018, according to New Frontier Data.

Aurora missed quarterly earnings estimates on the top and bottom lines Thursday, posting an adjusted EBITDA loss of C$39.7 million — wider than the C$20.8 million expected by analysts. It also announced it is halting production plans at its facilities in Canada and Denmark to shore up its balance sheet.

Aurora chief corporate officer Cam Battley said on the earnings call that governance issues and evolving consumer demand were challenges for the sector. 

This came as rival Canopy Growth also reported weaker-than-expected earnings.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” Mark Zekulin, CEO, Canopy Growth said after the miss, according to MarketWatch.

The Alternative Harvest ETF (MJ) is down more than 30% this year, but Bingham says the fundamental adoption of products by consumers will be the biggest factor to turn things around for the cannabis sector — especially in the U.S.

“In the United States, we see market growth in the mature states of about 21% this year, and then you add on the new states that are going to adult use in January of next year, like Michigan and Illinois, and you can see tremendous growth,” Bingham explains. “Let's face it, in terms of the overall growth rate, you can't have 100% compound growth rate for year after year.”

But some in the industry fear Canadian companies could overtake the U.S. market if cannabis is legalized federally, speculating that more established Canadian players could build out their supply chains faster than smaller U.S.-based brands.

“A number of people are saying ‘the current environment is attractive for me to get my business to be substantial and profitable,’” Bingham explains. “It is, however, difficult to expand from one state to multiple states under the current situation. You have to set up an entirely separate organization structure in each state. There are large American companies emerging in California and Colorado, but they're not really yet able to get to the same type of scale in terms of capital as the Canadians.”

So what can set the winners apart from the losers in the space? Bingham speculates consumer trust in an established brand will be what determines a company’s success. 

“There's no doubt that ultimately consumers are attracted to brands,” Bingham says. “They expect that experience is going to be consistent and predictable. Once they've found a brand that they like, they will stick with it. So we're now in this phase where it's not so much about distribution and getting onto the shelves, but actually starting to resonate with a consumer.”

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