Marijuana News Today
Profitability is the big issue in the marijuana news today, with one pot company in particular likely to hit profitability very soon.
There have also been some industry-defining occurrences at two major marijuana companies: Canopy Growth Corp (NYSE:CGC) and Aurora Cannabis Inc (NYSE:ACB).
I’ll start with perhaps the most positive news we’ve seen in the marijuana industry in a long time: Aurora Cannabis is likely going to be the first profitable legal pot company, according to one of the top Wall Street marijuana analysts, Vivien Azer.
First you have to understand why profitability is so important. Much like tech companies, marijuana companies thrive on potential right now. Which is to say, the future possibilities of the broader marijuana market are very enticing. But in order to achieve those possibilities, a lot of money is going to need to be spent.
Tech companies like Uber Technologies Inc (NYSE:UBER) remain unprofitable despite massive infrastructures and huge user bases. Of course, marijuana is a fundamentally different beast than tech, but the concerns remain: Are investors being sold dreams or a likely future?
Azer contends that Aurora Cannabis is very close to profitability. In fact, she rates the stock as “outperform” precisely because of the company’s path to profitability. (Source: “Aurora Cannabis Could Be One of the First Marijuana Sellers to Turn a Profit,” Barron’s, June 24, 2019.)
“At a time when EBITDA losses across the industry are elevated, we have a strong appreciation for ACB’s operational rigor,” wrote Azer.
Aurora holds the No. 2 position in legal recreational marijuana revenue and is among the best pot companies at keeping a variety of products in stock in Ontario, British Columbia, and Alberta.
It also has the largest cultivation footprint in Canada, which means it can quickly access the medical or recreational cannabis markets as each industry ebbs and flows.
Azer wrote that ACB stock was in a very strong position “given its near term path to profitability in conjunction with strong early stage execution within the nascent Canadian cannabis adult use market.”
Aurora Cannabis stock remained flat in early-morning trading today, as well as over the past five days. Considering how dire the past few days and weeks have been for other marijuana stocks, ACB stock’s inactivity is actually a victory.
So let’s break down some of Azer’s claims. For the most part, I’m with her.
Aurora Cannabis stock does have huge potential for future gains. If the company can record steady and consistent profitability, then I would likely be back on board with Aurora.
Another huge thing going for the company is that it has yet to strike a major partnership with an outside company. While Aurora has sought to foster gains via acquisitions, it has yet to broker any major deal with a big company in an adjacent market.
Rumors had swirled that Aurora was in talks with The Coca Cola Co (NYSE:KO) to form a partnership centered on cannabis-infused beverages, but that deal never materialized.
As such, Aurora is a prime target for a massive partnership, and if one were to land, we could expect to see ACB stock surge.
Where I diverge from Azer is in her assessment of Aurora Cannabis relative to Canopy Growth.
While both are strong companies, it’s hard to dispute all the progress that Canopy Growth has made, specifically in terms of entering the U.S. cannabis market. Canopy is simply more global and more ready for the future of the market.
Other than that, ACB stock looks ready to shine, with the company announcing that it was looking forward to the expanded Canadian cannabis market, where edibles and other products will be legalized in October. (Source: “Aurora Cannabis Prepared for Expansion of Canada’s Cannabis Market,” Cision, June 21, 2019.)
Since Canopy Growth’s weak quarterly report, CEO Bruce Linton has been making the rounds, trying to do damage control. The company suffered a big loss in its latest quarter, and CGC stock has taken a hit as a result.
Linton said that the losses stemmed from the company’s investments in intellectual property and production capacity. (Source: “Canopy Growth CEO Bruce Linton on Slow Marijuana Sales and the Promise of Cannabis Drinks,” Barron’s, June 25, 2019.)
He also said that Canopy Growth’s gross margins would have been much higher if the company hadn’t needed to deal with the expense of new facilities that hadn’t yielded their first crop yet.
Linton highlighted many of the strengths of the company, including the increase in its production space from 600,000 to 4.8 million square feet. “We’ve taken five quarters to create an eight-times bigger platform,” said Linton. “That decreases margins in the short term, but means we have a massive number later.”
Linton has also said in multiple interviews that Canopy Growth is focusing away from acquiring smaller marijuana companies and is instead focusing on getting its margins up.
Linton said Canopy Growth’s gross margin could be higher than 40% within one year. That would be good news, considering how hard CGC stock has been hurt by the massive losses in the company’s most recent earnings report.
Canopy Growth is focusing on the edibles and beverages market that is set to open by year’s end. Linton said that Canopy Growth’s brands will be second to none: “You’ll come to Canada and say ‘I want to buy a Tweed and tonic.’”
Cannabis-infused beverages have been one of the more exciting prospects for marijuana companies. If they are executed properly, they could open up a whole new segment of the market for cannabis producers.
The prospect of cannabis-infused drinks are also why alcohol companies have invested in several marijuana companies, Canopy Growth included. They want to avoid being overtaken by the pot sector and instead grow alongside it.
In another recent interview, Linton expressed again that his company will focus on expansion across markets and move away from acquisitions.
“We will not be buying anyone who currently produces cannabis in Canada for sure,” said Linton. “We’re more interested in what exists in the pharmaceutical world than the cannabis world.” (Source: “Canopy Growth is done buying smaller pot producers, CEO Bruce Linton says,” Financial Post, June 24, 2019.)
This is likely a move to assuage concerns of more big acquisitions coming up, which would mean more losses on the next balance sheet due to heavy upfront costs.
Canopy Growth stock fell in early-morning trading today, down by a percent. Over the past five days, CGC stock has dropped by nearly five percent.
That drop is a direct result of the company’s weak quarterly report, and that trend will likely continue for a few days, possibly weeks.
But overall, Canopy Growth is well positioned to dominate the global marijuana market through its variety of products and early footholds in many countries, including the United States.
ACB and CGC Stock Performances
The performances of ACB stock (black line) and CGC stock (blue line) over the past week are seen on the chart below:
Chart courtesy of StockCharts.com
The marijuana news today has two of the sector’s biggest players making big moves.
Aurora Cannabis is hoping to be the most profitable marijuana company around, or maybe the only one in the early stages of the industry. Canopy Growth, meanwhile, is focused on global expansion and hitting markets that have yet to be tapped into, like cannabis-infused beverages.
Both approaches are sound and both companies look strong in the long term. While marijuana stocks are still having a rough go of it these days, there is a lot to like on the horizon for the industry as a whole (and for ACB and CGC stock specifically).