For years, cannabis stocks have been the biggest thing since cutting bread on Wall Street. The expectation of continued state-level legalization in the US, along with Canada becoming the first industrialized country in the modern era to give marijuana the green light, was predicted to send potential ratings sky high – and this is for a period just what happened.
However, marijuana stock investors have received a dose of reality since the end of March 2019. Supply problems in Canada are very persistent, while exorbitant tax rates on legal weeds are problematic in the United States. While the long-term outlook for the legal pot industry is still very compelling, the full term seems challenging.
This is especially true for the Canadian marijuana industry.
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Canadian pot stocks appear to have a clear path to perform better in Q2
Canada was expected to be a cannabis leader, but it completely blew its chances of being the blueprint of the industry due to regulatory based miscues and too widespread capacity expansion.
Then again, Canada looked to turn the corner during the coronavirus 2019 pandemic (COVID-19). According to Statistics Canada, revenues from licensed cannabis stores have hit record highs. Here are the latest monthly figures for cannabis retail sales (all figures in Canadian dollars (CA $)):
- March: CA $ 181.2 million
- April: CA $ 178.4 million
- May: CA $ 185.9 million
For context, January and February generated sales of cannabis stores of CA $ 154.1 million and CA $ 151.9 million, respectively. With new dispensaries opening in key provinces, such as Ontario, and consumers apparently storing cannabis prior to home-stay orders in Canada linked to the pandemic, it was my expectation that Canadian pots would advance out. the gate would come. in reporting their May-as-June end-of-quarter results.
Oh, how wrong I have been.
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The Canadian weed industry has a new problem at hand
In the past week, we have seen that two of Canada’s largest producers have licensed their last quarter operating results. In both cases, even with Canadian licensed pot sales, up since the beginning of the year, the licensed producers delivered subdued results.
Last week it was Cronos Group (NASDAQ: CRON), which reported nearly $ 9.9 million in quarterly sales, $ 2.17 million of which was generated in the United States. Unfortunately, Cronos recorded more than $ 3 million in inventory, which, in addition to $ 9.8 million in cost of goods sold, led to a gross loss of $ 3 million and a business loss of $ 34.8 million for the quarter.
Prior to Cronos Group, it was New Brunswick-based OrganIGram Holdings (NASDAQ: OGI) deliver a dud. OrganiGram’s end-of-May quarter included CA $ 18 million in net sales, down from CA $ 24.8 million in net sales in the previous year. On an operational basis, and including an adverse adjustment of fair value to biological assets, OrganiGram produced a loss of operations of a whopping CA $ 99.3 million.
While there is a lot of finger-pointing to follow up on these abysmal results, one particular similarity with these companies has stood out: They both suffer a bit of debt on falling net cannabis sales prices.
In the press release of Cronos Group, it was formulated as “price of compression product price in the Canadian market.” Meanwhile, OrganiGram’s press release referred to it as “a lower average price driven by increased competition.”
The point is, the Canadian marijuana industry has a brand new problem: Plunging dried flower prices.
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Three Reasons Canada’s Marijuana Flower Prices Fall
How is it that the net selling price of cannabis could be in free fall if the Canadian weed industry is still relatively offensive?
To begin with, some of the blame can be attributed to regulators. In Ontario, provincial regulators stood by an ineffective lottery licensing system for dispensaries until December 31, 2019, before leaving it for a more traditional application and adjudication process. This lottery system left Ontario completely unprepared – but 24 stores were open in mid-October 2019 – and led to major bottlenecks in the region.
Second, licensed products are partly to blame. Without a single privilege for a legal marijuana industry in an industrialized country, pot stocks expanded their production capacity and made acquisitions without really understanding the rationale of their decisions. In recent months, dried flower has flooded a market that simply does not have enough dispensaries to sell it.
And third, the black market remains a nuisance for the Canadian cannabis industry. With taxes on legal purchases of weeds, the only way for pots to compete for price is to compete with the illegal sector by producing value-added product. While these value markets can help attract legal-channel consumers, they have absolutely devastated margins and the pressure toward profitability (see Cronos and OrganiGram).
At this point, Canadian marijuana files are left with a difficult choice. On the one hand, they could produce a value to capture the black market and potentially secure a loyal following of consumers. Then again, if you do this, margins will be destroyed in the long run. On the other hand, they may target premium product and risk not winning significant brands, but maintaining their margins in the process.
The right path is to advise everyone at this point, which is what continues to make Canadian pots a risky investment.
