What to Expect When the Biggest Pot Stocks Report Earnings This Week

The marijuana industry has proved unstoppable in recent months. To our north, Canada has become the first industrialized country to legalize recreational marijuana, while in the U.S., the Farm Bill legalized hemp production and hemp-based cannabidiol products. In addition, two-thirds of all states have now given the green light to medical cannabis in some capacity.

As for pot stocks, while they may have had a rough fourth quarter, they've come roaring out of the gate in 2019. The Horizons Marijuana Life Sciences ETF, which holds a basket of more than four dozen marijuana stocks with varied weightings, rose by nearly 50% in January, with some prominent pot stocks rising by close to 100% in a month's time.

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Ready or not, it's marijuana stock earnings season

The big question is, can marijuana stocks keep up this blazing pace of share-price appreciation? We'll find out this week, since a number of brand-name pot stocks are on tap to report their most recent quarterly operating results.

Although not every company announces their report date, it's expected that Aurora Cannabis (NYSE: ACB), Auxly Cannabis Group (NASDAQOTH: CBWTF), Tilray (NASDAQ: TLRY), and Canopy Growth (NYSE: CGC) will all announce their most recent operating results this coming week.

These are some pretty heavy hitters in the growing space, with Aurora Cannabis and Canopy Growth likely Nos. 1 and 2 in terms of peak annual production at over 500,000 kilograms per year at peak capacity, Tilray is capable of well over 200,000 kilograms if it further expands its capacity, and Auxly Cannabis will probably control 170,000 kilos annually at its peak.

So, what can Wall Street and investors expect when these brand-name marijuana stocks lift the hood? Here's a sneak peek.

1. High triple-digit sales growth

First of all, you should expect record revenue from pretty much every reporting cannabis stock this week and quarter. Not only will sales soar, but from what limited marijuana stock earnings reports we've seen so far, sales could be higher this quarter than what pot stocks had previously been producing for an entire year. Aurora Cannabis, for instance, generated $55.2 million Canadian in sales for fiscal 2018. This coming quarter, Wall Street will be looking for CA$54.6 million in revenue. That's going to lead to year-over-year sales growth of probably 200% to 500% for most pot stocks this quarter.

The big reason for this rapid growth is Canada's legalization of recreational weed, which went on sale last Oct. 17. Since most marijuana stocks have fiscal years that don't align with traditional calendar years, many will be reporting sales figures that include approximately 46 days before legalization (Sept. 1-Oct. 16) and 45 days post-legalization (Oct. 17-Nov. 30). This post-legalization period is what really did wonders for revenue growth.

The one exception I'd point to here is likely to be Auxly Cannabis Group. Although Auxly does have wholly owned grow sites, it was predominantly a royalty company until early last year. Many of its licensed partners aren't expected to begin yielding production until well into 2019. That means very little in the way of sales are expected for the upcoming quarterly report.

2. IFRS accounting profits, with big operating losses

Second, you can expect some smoke-and-mirrors profits to be on display as a result of International Financial Reporting Standards (IFRS).

Since Canadian-based pot stocks deal with what's defined as an agricultural commodity (e.g., cannabis plants), they're required to follow IFRS accounting rules. That means regularly adjusting the fair value of their crops throughout the growing cycle, and estimating the costs to sell these crops. In essence, a growing plant, flowering plant, and harvested or processed plant all have very different values, and this needs to be reflected above the line in the income statements of pot stocks. As you can see, this "guesstimating" leads to some wild adjustments in fair value that, in recent months, have worked out nicely for marijuana stocks. Expect IFRS accounting to potentially lift some marijuana stocks to big per-share profits that go well beyond what they generated in quarterly sales.

At the same time, you can expect pretty substantial operating losses, excluding one-time benefits and fair-value adjustments. Last quarter, Canopy Growth delivered a whopping CA$215 million operating loss, primarily the result of increased expenses tied to capacity expansion, acquisitions, marketing, branding, and international expansion. Expect these brand-name pot stocks to be deeply in the red on an operating basis this week.

3. Healthy cash positions

On the other hand, you can expect marijuana stocks to highlight the fact that they're well financed moving forward. Canopy Growth gained a $4 billion equity investment from Constellation Brands as of November, with Aurora Cannabis recently completing a CA$345 million convertible senior note financing, due in 2024. Although Aurora Cannabis has been known for its growth-at-any-cost strategy, management has reassured investors that this latest round of financing is likely to be repaid in cash sometime in the future, meaning little or no dilution.

With financing no longer a concern in Canada following recreational legalization, and bought-deal offerings remaining a viable option for capital raises, the big unknown this earnings season is what cannabis companies will be focusing on next.

4. Strategy, strategy, strategy!

Therefore, the fourth and final expectation investors should have this week is a full layout from brand-name pot stocks of what to expect in terms of strategy in calendar year 2019. This is going to be especially important for a company like Tilray, which has more than quadrupled in value since its July 2018 list price yet has provided very little color on what's happened with its efforts to expand its production capacity.

According to Tilray's S-1 prospectus filed with the Securities and Exchange Commission in June, it expected to have just over 850,000 square feet of capacity completed by the end of the 2018 calendar year, with perhaps close to 3 million square feet in additional land available for expansion purposes. With Aurora Cannabis and Canopy Growth able to produce more than 500,000 kilos at peak capacity, Tilray is going to have to do far more than just lean on just over 850,000 square feet of growing space, capable of maybe 80,000 kilos annually, if it's to maintain its current market cap of close to $8 billion. The strategy management discussed in Tilray's earnings report and conference call could be the most important event that happens this week.

Make sure to set those alarms, folks. It could be a bumpy ride.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group and Constellation Brands. The Motley Fool has a disclosure policy.