When will Canadian marijuana stocks be profitable?


Marijuana is expected to be one of the fastest growing industries in North America this decade. There are currently tens of billions of dollars in cannabis sales made annually on the black market. If these sales can gradually be shifted to legal channels through legalization, large players should see significant profit potential.

However, our neighbor to the north has completely faced his attempt to be a world leader in marijuana.

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Canada’s pot industry has been a mess

Although it became the first industrialized country to legalize recreational cannabis, Canada and its more than half a dozen well-known licensed producers have struggled.

Some of this blame can be attributed to national and provincial regulators. For example, Health Canada delayed the initial launch of high-margin derivatives (e.g., edibles, infused drinks and vapes) by two months in 2019, and took far too long to review and approve cultivation license applications. and sale before October 1st. 17, 2018 sales of dried flowers launched across Canada.

As for provincial regulatory bodies, some provinces have suffered from weak leadership. In Ontario, the country’s most populous province, regulators stuck to a lottery system to award retail licenses between October 2018 and December 2019. On the one-year anniversary (October 17, 2019) of the sales at was opened in a province that could comfortably accommodate nearly 1,000 retail outlets. While Ontario has since moved to a more traditional dispensary claims verification process, it will be some time before there is an adequate retail presence in the province.

Canadian Licensed Producers (LPs) are also to blame. Most of them failed to accurately predict what domestic consumer demand would look like at first, and are now forced to shut down grow facilities and significantly reduce their acquisitions.

A transparent jar filled with cannabis buds sitting on a small pile of money.

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At some point, the Canadian marijuana industry will get its act together. The $ 64,000 question is, “When will Canadian stocks of marijuana be profitable?”

According to consensus Wall Street estimates, investors will need to be patient.

Canada’s only LP expected to be profitable by 2022

The first LP on track to be profitable over a full year is Aphria (NASDAQ: APHA). Wall Street estimates that Aphria can generate earnings per share of C $ 0.08 in fiscal 2022 (the company’s fiscal year ends in May).

However, before anointing Aphria as Canada’s undisputed cannabis leader, know that the company’s operating results are getting some serious help with its acquisition of pharmaceutical distribution company CC Pharma. In fiscal 2020, total sales reached C $ 543.3 million, up 129% from the previous year period. But of that C $ 543.3 million, only C $ 150.4 million was associated with cannabis.

Generally speaking, pharmaceutical distribution margins are low and unimpressive. But distribution is a volume-based business that clearly helps push Aphria toward recurring profitability. To be clear, I’m not saying that investors should punish Aphria for being successful in an ancillary business segment. Rather, just understand that pharmaceutical distribution will hurt the company’s margins and value the company accordingly.

A close-up view of flowering cannabis plants.

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This LP quartet should be profitable by 2023 (if they survive)

For four well-known Canadian LPs, 2023 looks like their first chance to go green. Wall Street projects that Cronos Group, Tilray (NASDAQ: TLRY), HEXO (NYSE: HEXO), and OrganiGram (NASDAQ: OGI) will all become nominally profitable on a recurring basis in 2023.

Of this group, OrganiGram seems the most convincing. OrganiGram has not made any overpriced acquisitions leading to the legalization of weed in Canada, and it has only one operational facility in Moncton, New Brunswick. If the company can effectively control its spending and produce above-industry returns, it could easily become a winner in the long run. Investors will, however, need to be patient with OrganiGram as it ramps up its sales of higher margin derivatives.

On the other hand, it’s not even clear whether Tilray or HEXO can survive in the long run. Both companies issued shares and diluted their shareholder to raise capital, while losing money. The two companies also suffered substantial write-downs, with Tilray cutting the value of its purchase of Manitoba Harvest and HEXO wiping up the slate on its takeover of Newstrike Brands. To boot, HEXO is a radiation hazard.

A dollar sign shadow reflected on top of a pile of cannabis leaves.

Image source: Getty Images.

The most popular jar stocks are the last to turn profitable

Perhaps the biggest shock of all is that Canada’s two most popular stocks of marijuana – Canopy growth (NYSE: CGC) and Cannabis Aurora (NYSE: ACB) – should be the last among their peers to achieve recurring profitability. Wall Street is looking for a very small earnings per share of both companies for fiscal 2024 (i.e. March 31, 2024 for Canopy and June 30, 2024 for Aurora).

Even though Canopy Growth is the most cash-rich of all cannabis stocks, the company has lost money at an extraordinary rate and made grossly overvalued acquisitions. David Klein, a relatively new CEO, spent his first nine months on the job tightening Canopy’s belt. About 3 million square feet of licensed indoor grow space has been shut down for good, while stock compensation has been (thankfully) reduced.

Meanwhile, Aurora Cannabis has been one of the worst performers in the industry, with a share price down 96% since mid-March 2019. Aurora has closed five facilities, halted construction of two. his biggest projects, sold another greenhouse and took billions of Canadian dollars. dollars in write-downs after paying excessively too much for its numerous acquisitions. Like Canopy, it is also trying to get back to profitability by cutting expenses. But unlike Canopy, Aurora Cannabis has been forced to rely on market share offerings due to its continued consumption of cash.

Suffice it to say, Canopy Growth and Aurora Cannabis are two marijuana stocks that investors would do well to avoid.


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