Cannabis Companies like Canopy Growth and Aurora Have Proven the Huge Potential of the Cannabis Market
Cannabis industry stocks have failed to deliver the performance many expected a year ago, when Tilray Inc. (NASDAQ:TLRY) rose from about $30/share to over $148/share. Indeed, cannabis stocks have become victims of their own success. Or, rather, victims of the public’s excessive enthusiasm and greed. A correction was inevitable, and that correction is not a comment on the future of the cannabis industry. There’s little doubt that cannabis legalization will continue and that cannabis companies will thrive. But, there’s also little doubt that that same cannabis industry will experience consolidation and disruption, as the market continues along its Darwinian path, determining winners and losers.
It’s no time to give up on the sector, and the best investment attitude for the time being is patience and long-term expectations. There’s little doubt that cannabis will be one of the fastest growing industries, globally, over the next decade. It’s often forgotten that the cannabis plant has a variety of uses, most of which have little to do with recreation or health (though these certainly do represent some of the high value-added opportunities, which can produce sharp bullish moves in the context of financial markets.
Those cannabis investors, who find cultivating the virtue of patience taxing may want to consider distracting themselves with the looming battle between the cannabis stock giants, including the aforementioned Tilray Inc.; because, the consolidation momentum, like the famous tide, will affect all players for industry leadership. Of course, no discussion about cannabis leadership should take place without mention of Aurora Cannabis (NYSE:ACB), which boasts an estimated production capacity of some 700,000 kg. a year. Last September Aurora announced its fourth quarter 2019. Much was made about the fact that Aurora missed analysts’ expectations and its own guidance. In fact, Aurora posted a loss of six cents per share. But, the key figure in the current and evolving regulatory environment, characterized by partial legalization, comes from sales. And in that respect, Aurora has not disappointed. Its revenues were CAD$ 98.94 million.
The previous year’s revenue was CAD$ 65.14 million (in other words, sales have increased 50.0%). Expectations may have been high, but Aurora’s sales have shown investors just how big the market for cannabis could become when the politics and the Law finally catch up. And a key catalyst for that ‘catch-up’ should come in the form of the 2019 Canadian Federal election next October 21. Regardless of the outcome, the status of cannabis will not change. It shall remain legal.
The Conservatives have no plans to reverse the Liberals’ legalization, formalized in 2017, while the Green Party and the NDP want to apply an even more libertarian attitude. Just days before the vote, on October 17, the Government will legalize cannabis-based edibles and other derivatives, which should boost sales of cannabinoids considerably. A month before Aurora, Canopy Growth announced its Q1 2020 results.
The revenue of CAD$ 103.4 million stood out, considering it’s some 300.0% higher than the equivalent quarter for fiscal 2019. Aurora and Canopy, along with the other big players, are poised to capture a large slice of the cannabis market worldwide. Medicinal cannabis – an Aurora specialty – should continue to generate higher margins than recreational. But, the legalization of edibles and other derivatives should help recreational margins improve. The obstacle remains bureaucracy and politics, regulations and retail license releases are not moving anywhere near the demand for cannabis. Cannabis companies, from the majors like Aurora and Canopy to the smaller, ‘boutique’ ones, will need a few more quarters to become profitable. But, they have proven that a huge market (and earnings) exists behind the regulatory corner.
©2019 Midas Letter. All Rights Reserved.
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