Over the next decade, there's a very good possibility that marijuana will be the fastest growing industry in North America. Depending on which Wall Street forecast you prefer, the legal cannabis industry could grow anywhere between 12% and 17% per year, through 2030.
But that's not the case in the early going. Although Canada became the first industrialized country in the world to green-light recreational marijuana in October, the ramp up of adult-use weed in our neighbor to the north has not gone smoothly.
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Canadian pot sales hit a new high in March, but don't uncork the Champagne
Last week, on May 22, Statistics Canada released its monthly trade sales data for March for a variety of industries, which now includes cannabis stores. Since marijuana is such a tightly regulated industry in Canada, sales data reported to Statistics Canada is considered to be of extremely high quality, and therefore pretty darn accurate.
According to the May 22 release, cannabis store sales in March hit an all-time high, but that isn't exactly saying much when compared with the other months recreational pot has been legal since sales began on Oct. 17, 2018. Here's a rundown of cannabis store sales since October, as reported in Canadian dollars (CA$), with U.S. dollar equivalency in parenthesis:
- October 2018: CA$53.68 million ($39.98 million)
- November 2018: CA$53.73 million ($40.01 million)
- December 2018: CA$57.34 million ($42.7 million)
- January 2019: CA$54.88 million ($40.87 million)
- February 2019: CA$51.66 million ($38.47 million)
- March 2019: CA$60.54 million ($45.08 million)
As you can see, Canadian pot sales reversed a surprising two-month decline in January and February from the previous record-high sales total in December, although they've advanced very minimally from what was sold in the two-week period of Oct. 17-31 following the launch of recreational cannabis.
Furthermore, you'll note that aggregate sales over the past 5 1/2 months total just $247.11 million, putting the industry on track for perhaps $550 million to $600 million in trailing first-year sales on an extrapolated basis. That might sound great, but it's really not, considering that Wall Street has been calling for between $5 billion and $6 billion in annual Canadian pot sales by as soon as 2022.
Canada's marijuana teething pains, in a nutshell
If the popularity of cannabis and cannabis products is on the rise, you might be wondering how on earth sales are stagnating to our north. The answer is threefold.
The first problem has been caused by the regulatory agency Health Canada. Tasked with overseeing the licensing, processing, and sales application process, Health Canada has been hit with a monstrous backlog of paperwork that it's had no effective means to work through. Marijuana Business Daily notes that the agency had a licensing backlog of almost 840 applications in January 2019, with the average cultivation application taking many months to review, and sales applications taking almost a full year to approve, as of May 2018. Without these licenses, pot companies cannot grow, harvest, process, distribute, and sell their product.
If there is a silver lining (or perhaps a green lining in this case), it's that Health Canada is shaking up its policy to dramatically reduce its application backlog by requiring that growers complete their production facilities prior to submitting a cultivation license application. The agency notes that in more than 70% of approved cultivation license applications over the past three years, the facility in question wasn't complete and ready for compliancy review. This policy change should eliminate a lot of the smaller and underfunded players.
Second, this is a packaging problem. Health Canada outlined a laundry list of labeling, warning, and safety requirements in 2018 that packaging would need to follow if growers had any hope of getting their products to dispensary store shelves. Unfortunately, compliant packaging has been limited, which means that unprocessed cannabis has been stuck on the sidelines.
The third and final issue is with the growers themselves, albeit I don't fault them one bit. Constructing greenhouses and acquiring capacity can be very expensive, and most of these pot stocks didn't want to outlay tens or hundreds of millions of dollars without knowing for certain that the Cannabis Act would become law. It didn't become apparent until roughly December 2017 or January 2018, when excise tax agreements were reached between Canada's federal government and most individual provinces, that the Cannabis Act would indeed become law. But the wait amid the Canadian Senate debate has left most pot stocks still attempting to ramp up production.
A mixed bag for Canada's biggest players
As you might imagine, Canada's persistent supply problems have dealt quite a blow to the marijuana stocks that possess the largest premiums -- namely, Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB). Sales and bottom-line estimates for both companies -- which are lugging around market caps of $16 billion and $9 billion, respectively -- have been declining steadily for more than three months.
With regard to Canopy Growth, packaging shortages are the likeliest culprit in its struggles. The largest pot stock in the world already has more than 4.4 million square feet of its 5.6 million square feet of eventual production licensed for cultivation by Health Canada, meaning it's probably not twiddling its thumbs while awaiting licensing.
The same can't be said for Aurora Cannabis, which is sporting an industry-leading annual run rate of more than 150,000 kilos, as of March 31, 2019. The problem here is that Aurora's largest facilities are still awaiting the green light from Health Canada for cultivation, albeit some are still in the process of being constructed, such as the 1.62-million-square-foot flagship Aurora Sun campus in Medicine Hat, Alberta.
As long as these supply constraints exist (and they're not going to disappear overnight), sales are likely to underwhelm Wall Street, while operating losses could grow at a faster rate than initially expected.
But the positive for Canopy Growth and Aurora is that these deep-pocketed pot stocks should have the advantage in terms of getting additional facilities licensed under Health Canada's new policy. Canopy Growth ended 2018 with almost $3.7 billion in cash and cash equivalents, while Aurora ended March 2019 with $259.1 million in cash and cash equivalents, with $750 million in a shelf offering at its disposal. Small businesses that lack the financing to complete the construction of greenhouses for licensing purposes are now at a distinct disadvantage to the likes of Canopy and Aurora.
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