Beyond the Bong
Huge Revenue Growth in Cannabis Stocks
Investing strategies can largely be broken into two categories: value and growth.
And for decades, there’s been a war of words about which one wins in the end.
Value focuses on the long term. Those investors preach “the tortoise beats the hare.”
Growth is brash and focuses on just that… growth.
As a whole, cannabis isn’t a value play.
Though we try to show each week where there’s value to be found. Because in my view, undervalued growth stocks are the most transformative force in a portfolio.
And last week, cannabis’ growth was center stage…
In big news, Israel approved medical cannabis exports.
The country will likely begin shipping medicinal pot overseas in the second half of the year, with a potential market of $1 billion to $4 billion annually.
This is a big step, as it joins the Netherlands and Canada as the world’s medical marijuana exporters.
But the real focus last week was on pot stock earnings… especially as the two biggest players in the market reported.
First, Aurora Cannabis (NYSE: ACB) reported that second quarter 2019 revenue shot up 363% to CA$54.3 million!
Even more impressive, this was an 83% sequential increase from the first quarter.
We’re starting to see those Canadian adult-use sales in full swing. To keep up with demand, Aurora’s production in the quarter surged 57% to 7,822 kilograms.
But in cannabis, we know that there’s going to be eye-popping growth at this stage.
So the attention turned to the fact that gross margins contracted from 70% in the first quarter to 54% in the second. This was due to the fact that the average price per gram fell as oils temporarily made up a smaller portion of Aurora’s overall mix.
The rush following adult-use legalization meant new consumers focused on good ol’ bud, not concentrates.
But here’s the big takeaway: Aurora accounted for 20% of all sales in the Canadian market.
Canopy Growth Corp. (NYSE: CGC) and its rival Aurora combined to account for half of the entire recreational market.
In its third quarter report, Canopy – the largest cannabis company in the world – reported revenue jumped 282% to $83 million.
Though, unlike Aurora, it saw its average selling price per gram increase 19%. That’s due to the fact that the company’s SoftGel capsules accounted for 33% of revenue. And in the quarter, Canopy took steps to secure cannabis oil supply for these SoftGels. (Check out our “Top 5 Pot Stocks to Watch” for more details.)
Finally, international sales grew 170% to $2.7 million. Though those sales were largely to Germany.
Canopy and Aurora dominate the Canadian market both in terms of size and revenue.
Which leads us into this week’s “Making the Grade.”
Making the Grade
Over the past few weeks, we’ve been looking at valuation and technicals for pot stocks.
This week, it’s more fundamental: revenue.
My team and I looked at revenue growth based on the last quarter. And the gains were massive!
Freedom Leaf (OTC: FRLF) won the gold star with a massive jump in revenue of more than 45,000%! Of course, it was from a very low base.
TerrAscend (OTC: TRSSF) saw revenue spike more than 30,000%.
And, as I said above, we know the growth is going to be there. That’s why, among the top 10, the smallest recorded growth was still 680%.
We also pulled trailing 12-month revenue…
Here, Aurora and Canopy were top dogs. They were joined by fellow Canadian producers Aphria (NYSE: APHA), CannTrust Holdings (OTC: CNTTF) and Zenabis Global (TSXV: ZENA).
The other five were U.S. cannabidiol (CBD), packaging and vaporizer companies.
Top 5 Pot Stocks to Watch
1) Plus Products (OTC: PLPRF): Plus Products earns this spot on our list because it’s No. 1 in the California edibles market. In the fourth quarter of 2018, BDS Analytics retail data showed that Plus had three of the top-selling branded products.
On top of that, the company widened its lead over the second-best-selling edibles company.
Shares are on a tear, up more than 30% in the past month.
2) Shopify (NYSE: SHOP): Shopify is on a tear of its own. It became the fastest software-as-a-service company to hit $1 billion in revenue. In its fourth quarter results released last week, Shopify reported revenue surged 54% to $343.9 million. Total revenue for the year surged 59% to $1.07 billion.
The e-commerce platform has long been one of my favorite retail plays on the Canadian adult-use market. Most investors forget the lack of physical dispensaries in the market.
3) Sunniva (OTC: SNNVF): Sunniva began selling products in January. Now the cannabis vertical is involved in the two largest markets – California and Canada.
Recently, Sunniva announced it received an additional $4 million in orders from dispensaries in southern California. And it believes revenue of its U.S. branded products will top $55 million this year, with combined gross margins between 40% and 50%.
4) Green Growth Brands (OTC: GGBXF): Green Growth Brands isn’t content to rest on its laurels. People say idle hands are the devil’s playthings… and this company has been anything but idle.
We’ve covered its takeover attempts of Aphria. But to show how big the CBD market might become, Green Growth opened its first Seventh Sense CBD shop in Fayetteville Mall in Lexington, Kentucky, last week.
It also launched a new e-commerce site and announced a partnership with the largest mall operator, Simon Property Group (NYSE: SPG), for access to 108 retail locations to open more Seventh Sense shops. And it inked a deal with Tilray (Nasdaq: TLRY) and Authentic Brands Group to produce Greg Norman brand CBD products.
I’ve also covered its deal to sell CBD products at DSW Inc. (NYSE: DSW) stores.
5) MediPharm Labs (OTC: MLCPF): MediPharm Labs made its own headlines last week. The company announced a $35 million deal for private-label, purified cannabis oil extracts. The deal is with licensed producer Canopy, with $7.66 million to be purchased immediately and a minimum of $27 million in concentrates to be purchased over the next 12 months starting March 2019.
The total potential aggregate value of the deal is $48 million by February 2020.
Over the past month, pot stocks have started to cool down, as we can see from the Horizons Marijuana Life Sciences ETF…
Shares of Plus Products and MediPharm have really taken off. But the other three in this week’s Top 5 have largely remained in line with the marijuana ETF.
Each week, the marijuana market gets a little bigger. Pot stocks are currently riding the wave higher, reporting growth that has all other sectors drooling.
But we’re still in the early stages. There are bigger booms yet to come.
If you have a pot stock in mind that you’d like me to discuss here, leave the ticker symbol in the comments section.
3 Stocks to Watch After Aurora’s Monster Rally
May 18, 2020
6 Pot Stocks at Risk of Being Delisted
March 31, 2020