Few if any industries have the long-term growth potential of marijuana. Global sales in 2019 are expected to soar by 38%, with aggregate annual revenue potentially quintupling between 2017 and the end of the next decade to as much as $50 billion. This rapid growth is the primary reason pot stocks have been virtually unstoppable for three-plus years.
However, with Canada becoming the first industrialized country to legalize recreational marijuana in October 2018, and numerous U.S. states having pushed forward legislation to green-light cannabis in some capacity, Wall Street's attention has rightfully turned to marijuana stock income statements. With this latest quarter containing the very first recreational weed sales in Canada, all eyes were on pot stock earnings results in the first quarter.
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An under-the-hood look at how Canada's top growers performed last quarter
Let's take a comprehensive look at what some of the top pot stocks in the industry reported.
|Company||Revenue||Gross Margin||Operating Income (Loss)||EPS|
|Canopy Growth (NYSE: CGC)||$62.3 million||22%||($117.9 million)||$0.16|
|Aurora Cannabis (NYSE: ACB)||$40.6 million||52%||($60.1 million)||($0.19)|
|Tilray (NASDAQ: TLRY)||$15.5 million||20%||($22.9 million)||($0.33)|
|Cronos Group (NASDAQ: CRON)||$4.2 million||45%||($7.4 million)||($0.05)|
|CannTrust Holding||$12.1 million||35%||($7.5 million)||($0.19)|
|HEXO||$10 million||52%||($5.2 million)||($0.02)|
|Aphria (NYSE: APHA)||$16.2 million||28%||($16.2 million)||$0.16|
It was certainly a quarter in which we saw revenue pick up significantly thanks to Canada's recreational legalization, but it really didn't have much impact on bottom-line results. That's because most marijuana stocks are still spending liberally on capacity expansion, brand-building and marketing, international expansion, production diversification, and acquisitions.
Furthermore, if one-time benefits and fair-value adjustments from biological assets were removed from the equation, not a single grower listed above would have even come close to a traditional profit in their most recent quarter, as evidenced by the sizable losses in the operating income/loss column above. The profits from Canopy Growth and Aphria were of the one-time adjustment/one-time benefit variety and not something positive having to do with their cannabis operations.
As the marijuana industry begins to find its footing and matures, here are a few things you'll want to keep in mind.
IFRS accounting can be tricky if you don't know what to look for
First, International Financial Reporting Standards (IFRS) can be confusing and tricky if you aren't paying close attention. Different from generally accepted accounting principles (GAAP) accounting, IFRS accounting for Canadian pot growers allows these companies to constantly revalue their crops based on the stage of their growing cycle, as well as a "guestimate" of the cost to sell this product, often months before it's actually sold. This guesswork is all done above-the-line, and can therefore improve gross margin with the wave of an accounting wand. That's why it's best, especially when dealing with Canadian-based growers, to focus on operating results, sans adjustments.
As you'll see from the aggregated quarterly operating results above, despite substantial revenue growth, popular pot stocks like Canopy Growth, Aurora Cannabis, and Tilray lost close to $118 million, $60 million, and $23 million, respectively, before nonrecurring benefits and expenses came into play in their most recent quarters. While this might change soon for Canada's largest producer, Aurora Cannabis, which has suggested it could be generating positive recurring EBITDA by the end of its fiscal fourth quarter (June 30, 2019), the general expectation is that pot stocks will be losing money on an operating basis throughout 2019.
Supply chain issues are a lingering problem
Additionally, after seeing these revenue figures, and looking at the recently released cannabis store sales data from Canada, it's pretty clear that Canada has supply chain issues it's going to need to work through.
Part of the problem for Canada is regulatory red tape. Health Canada is the agency responsible for reviewing and approving cultivation, processing, distribution, and retail licenses/permits. Unfortunately, the agency has only managed to approve 159 total licenses (through March 15) in more than five years, and it had a backlog of nearly 840 applications as of January 2019. Even if growers have completed construction of their greenhouses, they may be forced to sit idle because cultivation licenses or sales permits for those properties have yet to be approved.
Another supply chain issue is tied to a shortage of compliant packaging. Health Canada has laid out very specific guidelines on what cannabis packaging needs to look like and accomplish if it is to make it into dispensaries for sale. This lack of packaging has left plenty of raw and even finished product waiting in the wings for eventual sale.
These supply chain hurdles will take months to fix, and perhaps more than a year, which likely means slower-than-expected sales growth for most of these pot stocks, if not all of them.
Big players aren't necessarily big producers
Finally, take note that the biggest players in the marijuana industry aren't always the biggest when it comes to top- or bottom-line results.
For example, Cronos Group and Tilray are, depending on the day, the third- and fourth-largest pot stocks by market cap, with valuations hovering right around $6 billion. Yet, as you'll note, neither company produced much in the way of sales in their most recent quarter. Most of Cronos Group's greenhouse production won't even be complete for a few more months, while Tilray appears to be completely changing up its strategy by waving the white flag on Canada in favor of moving into the U.S. and Europe.
In comparison, CannTrust, HEXO, and Aphria have market caps of $815 million, $1.4 billion, and $2.5 billion, respectively, but delivered far better revenue figures relative to their valuation. Not to mention that CannTrust and HEXO both reported a similar operating loss to Cronos Group, but have a much better path to profitability than their larger foe.
Big-name pot stocks might be popular with investors, but small-cap and low-end mid-cap marijuana stocks are looking like a much better value.
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