Marijuana Profits vs. Marijuana Growth
It’s a very critical time for the marijuana industry. With a good amount of legal markets now open, including Canada and 11 U.S. states, pot companies are faced with an important decision: is now the time for profits or for growth?
One such company, Aurora Cannabis Inc (NYSE:ACB), faced that question recently and gave the wrong answer. Aurora Cannabis stock, as a result, plummeted.
In order to understand what happened to ACB stock, we first have to understand why the profit-or-growth question has come to the fore.
In the past, pot stocks surged in value due to what the companies could provide. There are literally millions of marijuana consumers globally who are an untapped gold mine for investors. That excitement helped set the tone early on for marijuana stock growth.
After all, this was a market that was proven to already exist; the marijuana black market was a multi-billion-dollar, globe-spanning industry. All the market research was done, a consumer demographic was charted, and a clear need in the market was demonstrated.
This was, as far as stocks go, a sure thing—not a sure thing in that all pot stocks would be profitable, but a sure thing in that someone was going to make a lot of money from legal marijuana. The key was identifying who, and investing accordingly.
But like all industries predicated on potential, there eventually comes a tipping point. One day investors and analysts are going to want to see solid results rather than just projections. They’re going to want to see real profits today rather than potential profits tomorrow. Companies unable to deliver will suffer mightily.
What marijuana companies have to do is judge what the appropriate time is for shifting gears from expansion to profits. With capital being a finite resource, it leads to an important dichotomy: will management sink more revenue into growing its business, or will it cut back on spending in order to juice profits.
Making the right choice at the right time can mean the difference between small or large gains, being an industry titan or a small operator.
With so many markets now legal for weed, companies are facing increased pressure to shift gears toward making profits.
This is precisely what precipitated one of the biggest shake-ups in the marijuana industry to date, the firing of Canopy Growth Corp (NYSE:CGC) co-founder and CEO Bruce Linton.
Linton was the most well-known executive in the marijuana business. He had helped build his company from a small operation in a derelict Hershey Co (NYSE:HSY) factory in small-town Canada into a global marijuana empire valued in the billions of dollars.
But with new ownership as part of a deal that Linton struck with Constellation Brands Inc, Inc. (NYSE:STZ), Canopy Growth’s focus on growth and spending was seen as the wrong direction. Linton soon found himself without a job.
Meanwhile, Aphria Inc (NYSE:APHA) recently became the first major legal pot company to show profits, a huge milestone for the sector and a big win for APHA stock. But even with this good news, Aphria stock didn’t stay on top for long.
And that’s because marijuana investors and analysts know that the industry is far bigger than Canada and a handful of U.S. states; it’s global. Why settle for a small piece of the pie when you can have an entire dessert buffet if you’re patient enough?
Right now, weed companies are making the decision whether to reduce spending and increase profitability or stay the course and continue to expand.
I believe that the right move is expansion; there’s simply so much more to this market that’s untapped. While solid profits may look good on balance sheets today, they look far worse if, in order to get them now you have to miss out on astronomical profits later.
In other words, it’s better to make $100.00 tomorrow than $20.00 today—but it requires patience.
And that’s what I’d advise investors to show now: patience. They shouldn’t be swayed by meager profits in the short term if they come at the expense of huge profits in the long term.
Obviously, finding a healthy balance between profits and growth would be ideal, but if no such perfect company exists, I’d argue that investors ought to think long-term when looking at the pot market and consider companies that are looking to expand. It’s riskier, certainly, but the reward will likely be worth it.
ACB Stock Overpromises, Underdelivers
The dichotomy I’ve outlined above expressed itself recently via Aurora Cannabis stock.
ACB stock dropped severely when the company underdelivered in its most recent quarterly report.
Chart courtesy of StockCharts.com
Aurora Cannabis Inc saw a net loss of CA$2.3 million on net revenue of CA$98.9 million, with adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of CA$11.7 million. (Source: “Aurora Cannabis stock drops after earnings, as pot sales miss revised target,” MarketWatch, September 12, 2019.)
Worse yet, the company failed to meet even its readjusted targets. Analysts surveyed by FactSet Research Systems Inc. had estimated adjusted losses of CA$0.06 per share on revenue of CA$108.0 million. Those targets were lowered by Aurora leading into the current quarter.
The company, in this case, didn’t go full tilt toward profits, but it did promise more than it could deliver. As you would expect, investors were not pleased.
Aurora Cannabis stock has been in a long and steady battle to regain its once-lofty title as one of the best pot stocks. At one point, the company was gunning for the top spot in the industry by market cap. But its acquisitions and other deals simply couldn’t keep step with the moves by other companies.
The takeaway from ACB stock’s story is that the company overestimated what it could deliver in the current market.
The fact is that the legal weed market is still growing, and many factors (like poor legalization rollouts, high taxation, and licensing fees, a burgeoning black market, etc.) have proved to be too much for the company to surmount this quarter.
Aurora Cannabis Inc would be better served by making realistic projections and keeping its eyes trained on the future of the pot sector.
The legal marijuana industry has only given us a glimpse of what it’s truly capable of.
As a result, companies that are pushing too hard toward profits are going to be let down when they aren’t able to exceed their projections (or even meet them) until we begin to see cannabis legalization in more jurisdictions.