Could a Cannabis Investment Be On Coke's Radar?

Coca-Cola (NYSE:KO) is a stable but evolving company that has adapted to changing consumer trends over the years. While its most popular products are its sugary drinks, its business is much more robust, with more than 500 brands around the world. In addition to soft drinks, the company also sells coffee, tea, juice, water, and plant-based drinks.

One offering that could soon be on the horizon for Coca-Cola is cannabis. Although it may seem like a risky move for a fairly conservative company like Coca-Cola, here's why a move into that industry may be inevitable.

The company is following the consumer

Coca-Cola made a big announcement this year: It's going to be offering its first alcoholic beverage in decades, a hard seltzer. Through its Topo Chico brand, it plans to launch the new products next year, and the reason is likely no mystery: During the coronavirus pandemic, hard seltzer has been selling incredibly well. Data from analytics company Nielsen shows that hard seltzer sales quadrupled over a 15-week period ending June 13. It's an incredible, and welcome, opportunity for Coca-Cola to continue growing its business. In 2019, the company reported revenue of $37.3 billion -- down 19% from five years ago, when it generated $46 billion.

"We're going to follow the consumer," Coca-Cola CEO James Quincey told CNBC in a recent interview when discussing the move into hard seltzer. And if that's the motivation, it may only be a matter of time before cannabis ends up on the company's radar as another significant growth opportunity. According to data from Grand View Research, the market for cannabis beverages could reach $2.8 billion by 2025, growing at an annual rate of 17.8%.

There were rumors in the past of Coca-Cola partnering with Aurora Cannabis

In 2018, it appeared that a deal involving Coke and cannabis producer Aurora Cannabis (NYSE:ACB) was right around the corner, with the soft-drink giant looking to make cannabis beverages. Nothing ended up materializing from that, but multiple sources did report it, and it's possible Coca-Cola did do some kicking of the tires.

If so, it wouldn't have been the only beverage company to do so. Constellation Brands (NYSE:STZ) , the maker of Corona beer, Svedka vodka, and more, has jumped into the cannabis market with both feet, investing $4 billion in Canadian pot producer Canopy Growth since 2017. And management at Diageo, which makes Guinness, has also said in the past that they're keeping an eye on the cannabis industry.

Quincey downplayed this possibility in 2018, saying Coke had no plans to get into the cannabis market. But he didn't outright say that it would never happen. Whether it's with Aurora or another cannabis company, investors shouldn't rule out the possibility of something happening in the future involving Coca-Cola. That's especially true as consumer attitudes on cannabis continue to change; a total of 11 states have already legalized it for recreational use, and another four could do so this year, with New Jersey, Arizona, South Dakota, and Montana voters deciding on whether to permit adult-use pot in November.

What does this mean for investors?

It's only a matter of time before another big name like Coca-Cola or Diageo joins Constellation Brands with a foray into the cannabis industry. Businesses grow and thrive by evolving and keeping up with consumer trends, and cannabis is rising in popularity. This year's been a banner year for pot sales, with several states, including Illinois, California, Colorado, and Ohio, reporting record numbers.

As pressure mounts for Coca-Cola and other companies to expand their own sales, cannabis offers an opportunity to broaden product lines and reach more customers. And while the federally illegal status of cannabis in the U.S. could be a deterrent in the short term, the Canadian market is wide open and could serve as a great testing ground.

All that said, this doesn't mean you should immediately buy shares in Coca-Cola because sooner or later it might invest in the cannabis industry. Investing in pot stocks themselves may be a better strategy. A large company -- whether or not it's Coca-Cola specifically -- getting into cannabis could energize the entire industry. The Horizons Marijuana Life Sciences ETF (OTC:HMLSF) has fallen 35% this year and is badly underperforming the S&P 500, which is up 4% over the same period. Even just one big name expressing interest in cannabis could get investors bullish on the industry again.

A pot stock like Aurora Cannabis that's fallen more than 80% in 2020 could potentially double, even triple, in value on the news of a big company from another industry entering the market. Amid a pandemic, it may be a while before that happens, but investing in pot stocks today could pay off in a few years, especially if marijuana legalization continues to progress in the U.S.

This article originally appeared in the Motley Fool.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.