OrganiGram Holdings Inc: Big Growth Coming for Battered, Tiny Pot Play

OrganiGram Stock Provides High Risk/Reward Opportunity

Pot stocks have been under pressure since trading at multi-year highs during the “Reddit”-fueled stock-buying frenzy in mid-February.

The vast majority of marijuana stocks have corrected by more than 30% to 60% from their February levels. That’s the case with OrganiGram Holdings Inc (NASDAQ:OGI), a vertically integrated producer of medical and recreational cannabis.

OrganiGram is currently a pure play in the Canadian pot market and it has a small presence in Germany and Israel.

The company currently has no exposure to the potentially massive U.S. cannabis market. I wouldn’t, however, be surprised to see OrganiGram start a venture there as the move toward recreational pot legalization continues in the country.

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Down But Not Out for OGI Stock

OrganiGram stock traded at $6.45 on February 11, but the subsequent three months have been merciless on shares of OrganiGram Holdings Inc.

OGI stock is down by 60% since February, despite rallying by 88% this year.

The below chart shows OrganiGram stock trading cautiously in a narrow sideways channel bordered by the 50-day moving average as resistance and the 200-day moving average around $2.00.

A drop by OGI stock to the 200-day moving average, representing a decline of 17% from the current price, would provide a strong opportunity. The key level has held in the past.

Chart courtesy of StockCharts.com

Revenues Set to Explode with Profitability on the Horizon

OrganiGram Holdings Inc reports in a fiscal year ending on August 31.

The company’s revenues accelerated from CA$6.1 million in 2016 to CA$86.8 million in 2020, representing a compound annual growth rate (CAGR) of 95%. The revenue growth rate contracted to 7.9% during the COVID-19 pandemic in 2020 and is expected to continue to stall this year.

Fiscal YearRevenues (CA$Millions)Growth
2016$6.1N/A
2017$5.4-12.1%
2018$12.4130.6%
2019$80.4547.0%
2020$86.87.9%

(Source: “OrganiGram Holdings Inc.” MarketWatch, last accessed May 14, 2021.)

Analysts estimate that OrganiGram will record a revenue contraction of 16.8% to CA$72.2 million in 2021, which will depend on the economic reopening in Canada, where the pandemic remains a major issue. (Source: “OrganiGram Holdings Inc. (OGI),” Yahoo! Finance, last accessed May 14, 2021.)

The good news is that Canada has been showing signs of economic improvement. Therefore, it’s not surprising to see that analysts expect OrganiGram’s revenues to surge by 57.8% to CA$113.9 million in 2022.

At this stage, the key for OrganiGram is its revenue stream and its ability to control expenses and narrow losses.

OrganiGram reported negative earnings before interest, taxes, depreciation, and amortization (EBITDA) for the last four years, but I expect this to improve as the company cuts its costs and drives its revenues.

Fiscal YearEBITDA (CA$Millions)Growth
2016$1.7N/A
2017-$8.2-568.1%
2018-$11.9-45.5%
2019-$60.3-407.2%
2020-$161.7-168.1%

(Source: MarketWatch, op. cit.)

OrganiGram Holdings Inc has been losing money on both a generally accepted accounting principles (GAAP) and adjusted earnings-per-share (EPS) basis.

Fiscal YearGAAP Diluted EPS (CA$)Growth
2016$0.01N/A
2017-$0.11-900.0%
2018$0.16244.4%
2019-$0.07-141.9%
2020-$0.79-1,064%

(Source: MarketWatch, op. cit.)

We should see improvements as the company’s cost side is controlled.

OrganiGram Holdings Inc is expected to narrow its adjusted loss to CA$0.43 per diluted share in 2021. This is despite the company’s revenues contracting in 2021. (Source: Yahoo! Finance, op. cit.)

The situation is expected to improve to a loss of CA$0.08 per diluted share in 2022.

OrganiGram has been free-cash-flow negative, but the company’s focus on cost containment should help drive its free cash flow.

Fiscal YearFree Cash Flow (CA$Millions)Growth
2016-$6.636.7%
2017-$40.2-509.5%
2018-$71.9-79.0%
2019-$148.8-107.0%
2020-$126.015.3%

(Source: MarketWatch, op. cit.)

Analyst Take

In my view, OrganiGram Holdings Inc’s expected revenue ramp-up and its pathway toward adjusted profitability in 2022 is encouraging.

Much of what happens to OrganiGram stock will depend on Canada reopening its economy as COVID-19 vaccines keep rolling out.

A final thing to consider is that the relatively small size of OrganiGram opens up the possibility of a takeover.