Over the next four years, theres arguably no industry thats expected to grow faster and more consistently on a global scale than the legal marijuana industry. Between 2018 and 2022, Arcview Market Research and BDS Analytics have called for a compound annual sales growth rate of 26.6%, leading to $31.3 billion in revenue by 2022.
Looking even further down the road, a handful of investment banks foresee global cannabis sales hitting $50 billion to $75 billion by the end of the next decade, with Jefferies issuing an optimistic outlook (albeit without a time frame) of $130 billion in annual sales. This would allow marijuana to potentially make double the soda industry in annual revenue.
This growth is a big reason why marijuana stocks have been so popular. Of course, no pot stock has been more popular or polarizing than Aurora Cannabis (NYSE:ACB), which is a favorite among millennial investors. When operating at full capacity, Aurora is very likely going to lead all growers in peak annual production, with yours truly forecasting 700,000 kilos a year, assuming ICC Labs existing projects in South America continue to be developed.
This is also a company that has managed to expand its operations, either through distribution or production, into 24 countries, which is far more than its peers. Moving into overseas markets might seem like no big deal for the time being, especially with growers struggling to meet the demand needs of the Canadian market, let alone international markets. However, when other growers are operating at peak capacity by 2021 or 2022, theres a very good likelihood that well see dried cannabis oversupplied and commoditized in the Canadian market. These overseas sales channels will ensure that Aurora Cannabis isnt ransacked by a decline in domestic per-gram dried cannabis flower prices.
But what you may not realize about Aurora Cannabis is that is that its business model isnt as cut-and-dried as you might think. In other words, it has a lot of ways, and geographic means, by which to generate revenue. Lets take a closer look at the companys fiscal second-quarter operating results to get a better idea of how all of these sales channels tie into one another.
For the quarter, Aurora Cannabis wound up reporting 62 million Canadian dollars in gross revenue, as well as CA$7.82 million in excise tax revenue that winds up being paid to the Canadian federal government. This led to net sales of CA$54.18 million in the second quarter, which was topped only by Canopy Growth and its CA$83 million in net revenue.
Where did this CA$54.18 million derive from, geographically? According to the companys SEDAR filing, CA$49.77 million in sales (91.9%) came from Canada, as you might have expected. Health Canada has made clear that it would prefer growers satisfy domestic demand first before exporting cannabis to international markets.
The remainder was generated from the European Union (CA$3.27 million) and every other country not located in the EU (CA$1.14 million), such as Australia, Mexico, and the Cayman Islands. Its worth noting that not all of the 24 countries that Aurora has distribution or production deals with allow medical cannabis patients to smoke dried cannabis. Therefore its important for the company to offer a line of alternative products, such as oils and softgel capsules.
Additionally, with infrastructure still in the process of being established in overseas markets, and economies of scale yet to take shape internationally, gross profit in Canada hit 62%, with gross profit in the EU and other markets coming in at 35% and 9%, respectively.
Now that you have a better idea of where the money is flowing in from geographically, lets break it down further to determine which operating segments are providing the biggest boost.
As youd expect, selling cannabis and cannabis-related products provided the bulk of Auroras revenue, but not all of it. In the second quarter, CA$25.99 million (48% of total sales) was recognized by the medical marijuana segment, with CA$21.58 million (40% of total sales) going to the consumer (i.e., recreational) segment.
For the medical segment, 59% of revenue came from dried cannabis flower sold in Canada (CA$15.41 million), with an additional CA$2.85 million of dried flower sold in the EU. Extracts (i.e., oils and other alternatives) accounted for just shy of 30% of total medical marijuana sales at CA$7.73 million, but this figure wasnt broken down by region.
Although medical marijuana offers a smaller patient pool than recreational pot, the margins are considerably higher with medical patients since theyre far more willing to buy alternatives products. Plus, according to the fourth-quarter National Cannabis Survey, medical patients use marijuana more frequently than adult-use consumers.
In the companys management discussion and analysis filing with SEDAR following the release of its operating results, it further dissects where the CA$21.58 million in recreational marijuana sales came from within Canada. The breakdown is as follows (note: figures dont add to 100% due to rounding):
Essentially, Ontario, Quebec, and Alberta accounted for 4 out of every 5 Canadian dollars in adult-use revenue. These are three highly populated provinces (relative to Canadas Atlantic provinces), but interestingly enough the adults in these provinces tend to use cannabis less often than Atlantic-based provinces like Nova Scotia, Newfoundland and Labrador, and Prince Edward Island, according to the National Cannabis Survey.
Additionally, we learn that a majority of this CA$21.58 million in revenue was dried cannabis flower (CA$18.8 million), with only CA$2.79 million in extracts sold to adult-use consumers. This is a big reason behind Auroras decision to focus on the medical marijuana community.
The remaining 12% of total sales, approximately CA$6.6 million, were generated from Auroras ancillary revenue channels. Some CA$3.44 million came from its horizontally integrated businesses, CA$1.23 million derived from analytical testing services, and CA$1.93 million came from patient counseling services. Unlike previous quarters, the company didnt recognize any revenue from its design, engineering, and construction services in the latest quarter. Most marijuana growers dont have ancillary revenue channels, which is another factor that makes Aurora Cannabis unique.
While Id be surprised if recreational revenue didnt surpass medical marijuana sales in the upcoming quarter due to strong demand in Canada, Auroras stated focus on medical cannabis patients should make its operating results markedly different from its peers in the quarters and years ahead.
Cannabis stocks are in a holding pattern right now — consider that the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has barely budged in the last month. Markets are waiting on the bipartisan legislation proposed in both the House and Senate to create protections for the states legalizing cannabis to play out. If the sector wins a favorable decision, it could start rallying again as it did for much of 2019. That is due to a boost in liquidity, as banks become permitted to offer services to companies in the sector.
Aurora Cannabis (NYSE:ACB) announced on Apr. 4 that it appointed Carey Squires as its executive vice president of Corporate Development and Strategy. Carey’s experience in capital markets signals that Aurora will seek global growth and partnerships with other firms. ACB shares are up over 70% year-to-date already. The stock could see profit-taking if markets weaken overall. But with such an event impossible to predict, investors are hoping for a favorable vote on the States bill to facilitate the financing of any big deals.
On Apr. 2, Aurora filed a preliminary prospectus that will allow the company to raise $750 million over a 25-month period.
On Apr. 5, the CEO of Constellation Brands (NYSE:STZ) told CNBC that Canopy Growth (NYSEQ:CGC) could make more than $1 billion in revenue by the end of its fiscal year. Constellation reasoned that Canopy can sell $5 billion to $6 billion worth of goods in Canada alone. Beverages and other edibles would add to the company’s addressable market potential.
Marijuana is illegal federally, but state governments have legalized it in some form in 33 states across the U.S. If more states legalize the substance, then Canopy, Constellation Brands and Aurora Cannabis could all, in turn, reward shareholders with good results.
On Mar. 25, Health Canada granted Canopy Growth a cultivation license for its facility in Fredericton, New Brunswick. The facility will start production of over 5,000kg of cannabis annually. Such positive benefits to the economy and job market are something for states to look forward to from cannabis legalization.
CannTrust (NYSE:CTST) could trade in a wide range after the company reported weak fourth-quarter results in the end of March. Revenue grew to 132% from last year to CAD $16.17 million. The company lost CAD $0.26 a share.
CannTrust is optimistic that its revenue growth will continue in 2019, thanks to additional capacity coming online. Its Phase 2 expansion, crop yield optimization and staff training will all drive output higher. By 2020, it estimates it will add between 100,000 kg to 200,000 kg of production. Looking ahead, the company will continue developing innovative products in anticipation of the expected legalization of the edibles market in Canada in late 2019.
Cronos Group (NASDAQ:CRON) has been one of the stocks to add to the “avoid list” due to its weak quarterly report. The company benefited from a CAD $2.4 billion Altria (NYSE:MO) investment, which closed in March 2019. The bad news is that the company’s average selling price fell from $6.43 in full-year 2017 to $5.74 for 2018. It blamed the falling ASP on an excise task. Operating expenses also ballooned from $9.3 million in full-year 2017 to $29.4 million.
Cronos has research and development activities that will take time before they pay off. Its big focus is on making sure that it has the technologies for leveraging on the rare cannabinoids and formulations to tailor them to devices. This requires the company collecting data to share with regulators so they are comfortable with it.
In the end, cannabis stocks have already staged a nice rally in 2019, which increases the risk of a pull-back if investors decide to book profits. Yet any positive developments on the legalization side of the equation could re-ignite another rally in the sector.