The Size of the Cannabis Market – Diving into the Numbers and Insights of Cannabis Legalization with Matt Karnes

Matt Karnes

Matt Karnes, founder of GreenWave Advisors takes his keen analytical eye and helps us understand the cannabis industry in size and profit potential compared to other “sin” industries.

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Key Takeaways:
[1:25] – Matt’s background
[3:31] – Matt talks about the content and numbers in his research report
[5:42] – Matt discusses the difficulties in analyzing the cannabis market
[6:57] – Comparing cannabis to alcohol
[7:50] – Matt compares the marijuana and alcohol industry in terms of size
[11:09] – Matt discusses why cannabis business can’t write off certain expenses
[15:11] – The big takeaways from Matt’s report
[17:27] – Matt talks about the new tax numbers coming out of Colorado
[21:06] – Matt discusses the marijuana industry moving forward
[22:42] – Contact details for GreenWave

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Click Here to Read Full Transcript

Matthew: Hi, I’m Matthew Kind. Every Monday and Wednesday look for a fresh episode where I’ll take you behind the scenes and interview the leaders of the rapidly evolving cannabis industry. Learn more at That’s Do you know that feeling when you sense opportunity, when you see something before most people and you just know it will be successful, then you're ready. Ready for CannaInsider Consulting. Learn more at Now here's your program.

We hear a lot of wild speculations thrown around about the size and scope of the cannabis industry. A lot of it without any real substance or data behind it. Today we’re going to take a much closer look at the size of the cannabis market from an industry researcher that has dug into the numbers and can paint a picture of the size and potential of the cannabis opportunity. I am pleased to welcome Matt Karnes of GreenWave Advisors to CannaInsider. Welcome Matt.

Matt: Thank you , good to be here.

Matthew: Now Matt to give listeners a sense of geography, can you tell us where you are in the world today?

Matt: I am in New York City in Manhattan.

Matthew: Matt you have quite a media report on the cannabis industry, but before we get into that, can you tell us a little bit about your background as an analyst and why you started GreenWave Advisors?

Matt: Sure. I served as an equity analyst both on the sell side and as an analyst on the buy side for a hedge fund. And during my tenure as a sell side analyst, I authored various industry reports on different emerging technologies, disruptive technologies, etcetera, and analyzed those type of companies when I was an analyst on the buy side. Prior to that I served as an auditor for Price Waterhouse. I had varying financial roles during the course of my career. And about a year, year and a half ago I just really took an interest in the cannabis sector realizing that there’s tremendous growth opportunity. And as I was doing my due diligence on the industry it occurred to me that there was really no information that was available in terms of, you know, quantifying the industry that provide, you know, real transparency into how you could take it, go about determining what the market size, potential market size is.

So I took that opportunity to conduct my own further due diligence and analyze the information that was available in those markets where marijuana is legally sold, and use that as a basis to prepare this report, this industry report which is, you know, a pretty lengthy, detailed report on where we are right now.

Matthew: Yeah it’s such an opaque market. It’s state by state. There’s the information can be slow to come out. It’s very difficult for someone that wants to get a macro sense of what’s going on to get real true information. What subjects are explored in your research report so listeners can get an idea of what you dig into.

Matt: Sure so basically what the objective of this report, our first report is sort of like a primer for those new to the industry, and you know maybe just puts things in a different perspective to those who are well familiar with the industry. And what we do is we kind of provide an overview of, you know, basically what cannabis is, what are the different components of the ecosystem. We also talk about federal laws, why we believe federal laws are likely to change, and we also provide an overview of some of the state laws. And then we do a deep dive, and we also have a long term view, a thesis on which direction we think the industry is going to ultimately… how it’s going to end up ultimately.

And a big part of what our report is is that we do a deep dive into those states where marijuana is legally sold, and we analyze the data and we look for commonalities among the states and we use that as a reasonable basis for our projections for those states that have not yet legalized. And we did this, we approached this in two ways. We looked at the medical marijuana market, and then we also looked at the recreational market, and we built two models. We have a detailed model state by state, and we map out our methodology. We indicate exactly how we get to our assumptions, why we use our assumptions. And then we consolidate both of our models to have, you know, to provide the industry estimates.

Matthew: So your background as an analyst, publically traded companies have so much information as far as, you know, the financials that it’s much easier to do due diligence on a company and figure out what they have going on. In contrast, what kind of information do we have for companies for people that want to dig into it, but they don’t have the readily accessible information of say a publically traded company?

Matt: Well it is really difficult and particularly trying to analyze the recreational market because we just don’t have the data available. On the medical side, you know, we know what the patient data is, we know sales are. There’s certain metrics that we’re able to calculate and we’re able to identify trends. But on the recreational size it’s much more difficult. And so looking at, you know, publically traded companies, what I believe is that everything is going to trade. At some point there are going to be more and more publically traded companies that are going to trade on exchanges that provide more liquidity and are, you know, more acceptable from the institutional standpoint. And these type of stocks whether or not, you know, in any type of ancillary business I believe that these stocks will trade in tandem with how the industry is moving as a whole.

Matthew: Now how can we thing about the cannabis industry in terms of prohibition ending similar to let’s say alcohol and then something that’s never been really in prohibition, cigarettes perhaps? I mean what kind of lens do you use to compare cannabis to alcohol?

Matt: Well there is actually a lot of similarities between prohibition with alcohol and where we are now in marijuana. So for example back in the day if somebody had some type of ailment, their doctor would prescribe whisky to alleviate that. We kind of go… we do an analysis and we do talk about the similarities between prohibition then and now. What we also find is that after prohibition the growth rate in alcohol sales was pretty significant. It was north of 20 percent. So we kind of factored that into what we are forecasting from the recreational standpoint, taking a haircut to that assumption.

Matthew: Okay. Now in terms of size, what is the size of the legal cannabis industry versus the alcohol industry so we can get a sense of comparison.

Matt: Well the thing is it’s really hard right now to figure out, you know, what the terminal value of marijuana is. So the alcohol industry is a mature industry as other sin industries. And the alcohol industry is, you know, triple digit in the millions, $100 million, $200 million. The spirits is about $72 million, wine about, I guess about a $30, I’m sorry, billions not millions. $72 billion for spirits, about $30 billion for wine, beer is about $100 billion. So that’s north of $200 billion. So where does that… how does marijuana compare to that, and also cigarettes, tobacco is about $290 billion.

So if you look at marijuana, what we anticipate under the trajectory, our anticipated trajectory for legalization. By 2020 we would expect a combined medical and recreational market to approach about $20 billion, and if you just then in 2020 say okay, all those remaining states, if they were to legalize by 2020, in that first year the market would be about $35 billion. So clearly from there we have a lot of growth. So it would not be unreasonable to assume that the marijuana industry could surpass the alcohol industry as well as the tobacco industry.

Matthew: Yeah and cannabilize it as well at the same time as it exceeds it. You know a lot of people turning to perhaps edibles or drinks infused with THC versus having a glass of wine or a beer. So I imagine that you know the big alcohol companies are really looking at this closely.

Matt: Absolutely.

Matthew: So the fact that most cannabis that are traded publically are penny stocks or what some people refer to as the OTC stocks, over the counter stocks, do you anticipate this keeping out the big Wall Street money from trading these shares?

Matt: Oh absolutely because there’s really a very limited liquidity. That’s a big concern. And also there’s, you know, very little transparency from some of these smaller companies. And you know, they need to be traded on a more stringent type of platform such as the New York Stock Exchange or the NASDAQ or what have you. That’s what’s going to attract the institutional investor base. Those exchanges also provide added comfort in the fact that, you know, there are more restrictions to list on those type of exchanges. So that’s another reason why institutional investors would be looking to invest in companies that are listed as opposed to the current environment.

Matthew: Now you mentioned you’re also a CPA. As you’re probably aware cannabis cultivators can’t write off a lot of their expenses. Can you just talk a little bit about how a normal business writes off expenses and then how a cannabis business can’t really do the same thing and how that hampers their profitability?

Matt: Yeah sure so basically, you know, any other type of business you have your revenues and you have your expenses. Your normal operating expenses are tax deductable. But in the case of cannabis, those companies that touch the plant are prohibited under Section 280E from writing off their operating expenses. So their rent and their, you know, utilities or what have you. The exception to that is the cost of sales which is the cost of the product, the actual flower, you know for example that a dispensary would purchase, and then also for a grow facility, you know the cost of producing that plant. But those are the cost of sales, but you know that’s it. That’s where the buck stops. And the IRS is scrutinizing all these type of businesses because there have been loopholes in which for example a medical marijuana dispensary would set up a separate consulting division within their dispensary to consult patients on various types of marijuana that would be advisable, you know, for a particular ailment.

And so by doing so they would justify writing off that pro-rata portion of the rent and all the overhead expenses. And so the IRS is really cracking down on this. The silver lining behind this though, at least the State of Colorado I know does allow normal operating expenses as tax deductions. So while you can’t take those write-offs, you know, at the federal level, you still have some benefit at the state level.

Matthew: Okay. So do you think there’s the prospect of cannabis as a medicine being something people individually put on their tax return and saying hey this is a tax deductible medical expense?

Matt: Well the federal government will disallow that because it’s illegal. Well there are still some questions regarding the tax deduct.. the personal tax deductibility of marijuana for medical purposes. But because it’s a Schedule I drug, you know, it’s likely that they’ll follow suit with how they’re viewing cannabis businesses from writing off operating expenses. But from a state perspective it would not be unreasonable to assume that if the state is allowing these type of deductions for a business, that they would also allow an individual to claim these type of medical expenses on their individual tax returns, you know, for their state income tax filing.

Matthew: Gosh that seems just crazy that, you know, unfair on how they’re treating cannabis businesses. Is there any other business out there that gets treated this unfairly in your mind?

Matt: It really comes down to, you know, being a Schedule I, you know, drug and you know when that changes tax laws will change and profitability will increase. And that’s in answer to the second part of your question, you know, how is it affecting profitability. Well essentially a business entity that is in this business that is touching the plant can conceivably pay more taxes. They can pay taxes even if they have a net loss. So you know it really is very challenging for these businesses.

Matthew: Now turning back to your report. It’s a big media report as I mentioned. What are some of the biggest benefits prospective customers would have in reading this report? What are their takeaways going to be? What are they going to learn?

Matthew: Well I think it really identifies certain trends that we’re seeing in those markets where marijuana is legally sold. And the takeaway would be like if you’re looking to invest in a state that is going to implement a marijuana program, you would you know have some insight as to what you could expect. We go to great lengths to identify the market size for the medical marijuana market. And by so doing we identify the different ailments and we come up with, you know, the potential market size and it’s very interesting, our observations, in terms of what we’re seeing that’s consistent among the states. And also, you know, we can look, we can clearly identify spending habits for medical marijuana users.

So you know while clear our model is not bulletproof and you know there’s definitely a broad range of assumptions that we make, but we believe that the analysis that we did in those states where marijuana is legally sold, provides a reasonable basis for our projections as well as the trajectory of, you know, when we think a different state will come on board. We expect once legalization occurs, we anticipate about a year before sales are actually transacted because it’s going to take about, as we all know, about you know that amount of time, maybe even a little longer to implement a program. However as time goes on we believe that best practices will be followed, and it will just make it that much easier for the new states that are coming on board to implement. So that actual timeframe could conceivably compress from a year plus to, you know, less than a year.

Matthew: And that is happening as you mentioned. I’ve talked to some state regulators, and they mentioned that other states are reaching out to them asking for advice, what’s worked, what hasn’t worked. So they iterate and they get better with each state coming online which is nice to hear. Now I understand that the Colorado tax figures just came out. Can you tell us a little bit about what those numbers said?

Matt: Well yeah so the interesting thing is that we are seeing, as we outline in our report, the medical marijuana is declining. Year over year is, I think it’s roughly negative, it’s decreased about one percent or so. And the recreational market is growing. It’s yet to be seen, you know, how everything’s going to play out. The number of patients also is declining, and so we believe that the recreational market is disrupting the medical market. And long term we believe that they’re just going to be one market. And now from a tax standpoint, you know, fell a little short I believe from expectations. That could be in partial because of an excess supply.

So because of the excess supply prices came down, and as a result of that, there’s less sales tax. Now bear in mind that’s about half of the revenues because if you make the assumption that about 50 percent of the retail sales come from edible products and 50 percent are from flower. It’s really the flower that has that exposure to the oversupply because for the most part the edible products and the infused products the price points pretty much stay consistent. So it’s that’s flower. And I think this is a lesson learned that for any state you really don’t want too much supply out there. While it’s nice to get these application fees from everybody, you know, longer term if there’s an oversupply, that’s going to continue to put pressure on pricing, and as a result of that we’ll see lower excise tax collections and we’ll see lower sales tax collections.

Matthew: It really is about finding that balance as a state too because you know a black market still exists for a lot of different reasons that people listening to the show may not really think about. So it’s like you want the price to be low enough where it gets rid of the largest bulk of the black market possible, but you don’t want it so low that they don’t make any tax revenue and you know don’t get any benefit from having legal cannabis from… that’s states’ perspective anyway.

Matt: Absolutely. And you know the interesting thing is there’s so many opportunities in this industry. It’s not all about the products that contain the THC. It’s the cannabinoids, you know, the industrial hemp, that’s another huge area that we will explore. And the non-THC products, it’s just amazing how the elder generation are now warming up to the idea of marijuana legalization. I can tell you I have a 87 year old aunt who suffers from chronic nerve pain. She’s tried everything possible. I convinced her to get a medical marijuana card in Arizona. She got one, and she tried different ointments and so forth and it’s really helping.

Matthew: Oh that’s great.

Matt: And you know I think that’s kind of the buzz around the retirement community.

Matthew: I bet. That’s some juicy information. Okay so you were just recently in Colorado. You’ve kind of done your tour around here, and what do you see that kind of excites you or looking ahead, how do you see the industry changing because it is moving so quickly. What are your general thoughts about where we are versus what’s coming in the next year or two?

Matt: Well you know clearly branding is very promising. There are many companies, not many, but there are a handful of companies that are really very appealing from a branding standpoint, and I believe, you know, they’re going to continue to expand and look at opportunities in other states via licensing deals. And I just think you know certain subsectors of this industry are either going to be irrelevant or insignificant, you know, at some point when laws change. Not every aspect of the ecosystem is sustainable, but there’s going to be a lot of changes I believe.

Matthew: We now can you give an example or two of what you mean might go extinct?

Matt: Well for example if you go to a dispensary, as you know they don’t… there’s limited banking capabilities so most just deal in hard cash. And as a result of that and because there’s so much cash on hand they have to hire armed guards. And the security costs are a lot more than they would have been otherwise if banking was permitted. So those type of companies I don’t believe will be needed to the extent that they are now when laws change.

Matthew: Yes, that’s a great point. That’s an excellent point. Well Matt as we close here, how can listeners learn more about you and find your report?

Matt: Well we are at… you can visit us at We just issued our State of Colorado report. It’s a one year anniversary. It’s a look at what we’ve seen, the first state with a dual market for one full year. So we look at the dynamics from the recreational market and the medical marijuana market and what patterns we’re seeing. And we do a real deep dive and we look at, you know, information across different counties within the state, different trends. And we hope that readers will find it of interest as they evaluate investment opportunities either within the State of Colorado or look to that as the bellwether for or best practices for other states, for investing in other states.

Matthew: Well that’s great. I really encourage readers to check out Matt’s website. He does bring a high level of knowledge as he mentioned from another industry and focuses that right on the cannabis industry. He’s really digging into a lot of information at a granular level that no one else is really doing right now. Matt, can you give out your URL one more time?

Matt: Sure it’s And I would like to also offer your listeners and your visitors to your website a 10 percent discount code off the price of the product and the coupon code is CANNAINSIDER.

Matthew: We always like that, thank you Matt. Well Matt thanks so much for being on CannaInsider today we really appreciate it.

Matt: No problem.

Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes. Every five star review helps us to bring the best guests to you. Learn more at What are the five disruptive trends that will shape the cannabis industry in the next five years? Find out with your free report at Have a suggestion for an awesome guest on, simply send us an email at feedback at We would love to hear from you.