Thinking About Playing the Marijuana Boom? Don’t Do It Without Canopy Growth, Tilray and Aurora Cannabis

The marijuana sector has been hyped up a lot over the past two years, as investors set their sights on a generational growth opportunity that was long suppressed by an archaic drug war.  Last year, Canada became the first Group of 20 nation to legalize the consumption and sale of recreational weed, joining Uruguay as the only other nation to do so.

The Supply Floodgates to Open Soon

After a successful pump of some of your favorite marijuana stocks, Canada now finds itself in the midst of a serious pot shortage. The reason: weak supply chains and a hefty backlog of cultivation licenses from Health Canada. At last check, the application backlog stood at roughly 840. That’s 840 license applications to begin growing pot. Translation: Canada’s pot shortage will very quickly turn into an oversupplied market.

As The Motley Fool recently pointed out, Canada’s big marijuana players have three ways to drain the supply glut:

  1. Use large grow ops to achieve greater economies of scale, (i.e. achieve peak output while lowering per-gram production costs);
  2. Focus on alternative pot segments, such as oils;
  3. Divert attention to international markets where medical marijuana is legal (this opens the door to the U.K., Germany and several U.S. states).

Based on these options, three companies stand out from the rest: Canopy Growth (WEED), Aurora Cannabis (ACB) and Tilray Inc. (TLRY) . These companies also happen to be ranked nos. 1-3 in terms of overall market cap and are better positioned to meet marijuana’s addressable market.

Addressable Market 

Depending on who you ask, the addressable market or revenue opportunity for the global marijuana market could be as high as $150 billion. But even if we assume a much smaller number, it wouldn’t take much for these three companies combined to snag anywhere between 5-10% of that pie if we assume a price-sales ratio of 5, which is the midway point for the vice industries.

As of Friday’s close, Canopy already had a total market capitalization of $20.4 billion. For Aurora Cannabis, that figure was $12.2 billion and $6.3 billion for Tilray. Three months ago, Aurora’s market cap was a little more than half of Tilray’s.

Let’s take a look at what makes these three companies so special.

Canopy Growth

Based in Smiths Falls, Ontario, Canopy Growth Corp has quickly emerged as the world’s largest marijuana stock. The company enjoyed a large cash infusion last year after Constellation Brands, the maker of Corona beer, wine and spirits, purchased 104.5 million WEED shares at significant premium. The investment by Constellation Brands is no accident; the beverage company has pegged the global marijuana industry at $200 billion over the next 15 years and believes Canopy will be at the helm of that growth.

The cash infusion from Constellation allowed Canopy to boost its already strong balance sheet, putting it on firm footing to expand production and strengthen global supply chains. The Smiths Falls-based company is considered a cash cow and isn’t afraid to use its resources to boost its market share through strategic acquisitions.

At this rate, Canopy is poised to not only increase its share of the recreational cannabis market but continue its expansion into medical marijuana. This is due in large part to a strong partnership with Aphria Inc. (APHA), which was granted a medical marijuana license by Health Canada back in 2014. Canopy also acquired Mettrum Health back in 2017, significantly boosting its patient reach across Canada.

Canopy reported a revenue increase of 283% in the most recent quarter, providing a glimpse of what lies ahead for big marijuana growers. The company boasts ten cultivation facilities spanning 5.6 million square feet (77% of which is licensed by Health Canada).

Aurora Cannabis

In terms of peak production, no marijuana grower has the same output capacity as Aurora Cannabis. Analysts estimate that the Edmonton-based company has a peak annual yield of between 570,000-700,000 kilograms. This will likely grow following major acquisitions of CanniMed Therapeutics, MedReleaf and ICC Labs (the latter adds 92,000 square feet of operational capacity as well as 1.1 million square feet of greenhouses). Just like Canopy, Aurora Cannabis is well positioned to expand its presence in both the recreational and medical marijuana markets.

Aurora disclosed a surge in pot sales during its most recent quarter but reported big earnings losses and shrinking margins. Despite reporting a loss of $237.8 million, the company says $190 million of that total was due to investments in other companies. According to Health Canada, Aurora accounts for 20% of marijuana sales across the country. This largely explains the near tripling of its revenue.

One area of concern was the sharp drop in gross margin, which Aurora attributed to a ramp up in production and distribution costs as well as a lower average selling price per gram of dried cannabis. That being said, it gave positive revenue and earnings guidance, including “sustained adjusted Ebitda profitability” in the near future.

Just last month, Aurora shipped its first cannabis oil to the United Kingdom, adding to a growing list of international vendors that includes more than 20 companies. The company is expanding its presence internationally, including the purchase of High Tide Inc., a Mexico-based medical marijuana distributor.

Tilray

Since going public last July, the Nanaimo-based Tilray has been one of the most talked about marijuana companies. It was one of the biggest benefactors of the pot-stock euphoria of 2018 as its market cap swelled to a high of nearly $28 billion in September. Although its share price has come crashing back down to earth, Tilray continues to be subject to positive speculation tied to pending partnerships with big-name beverage and tobacco makers.

Like other pot growers, Tilray is focused on boosting its production capacity and increasing its international presence. The company currently has about 3 million square feet available for expansion, providing plenty of room for increasing output, especially for medical marijuana purposes. Adding to its production capacity is a $26.3 million acquisition of Canadian cannabis producer Natura Naturals, which was completed in December. During the most recent earnings call, Tilray CEO Brendan Kennedy said the number of companies allowing medical cannabis could “grow to 50 or 60 by the end of 2019.”

The earnings call revealed revenues of $15.5 million in the fourth quarter, which boosted full-year sales of $43.1 million. That represents a 110% increase over the previous year. Sales in the fourth quarter surged 204%, easily outpacing forecasts. Despite reporting a bigger net loss in Q4, the number of kilograms of cannabis and derivatives rose nearly three-fold year-over-year. Kilograms sold in all of 2018 rose more than two-fold to 6,478.

Right now, Tilray is seen as the weakest company of the three we have covered. Analysts say it isn’t as well positioned as Canopy and Aurora to capitalize on recreational cannabis and its medical marijuana sales fall well short of its rivals.

Featured image courtesy of Shutterstock. 

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi