The
marijuana industry is expected to be a big-money business, and all eyes
are on Canada.
That's because Canada became the first industrialized
country in the world -- and only the second country overall (behind
Uruguay) -- to legalize recreational marijuana this past October.
In
the grand scheme of things, Canada isn't expected to be a big-time
cannabis player, with most estimates calling for anywhere from $5
billion to up to $10 billion in annual sales in five to 10 years.
That
compares to expectations for as much as $100 billion
in cannabis and cannabinoid-based sales in the United States in 10
years. Nevertheless, Canada is the world's cannabis guinea pig of sorts
and is almost certainly setting the foundation for future legalizations
around the world.
View photos
A
cannabis leaf laid within the outline of the Canadian flag's red maple
leaf, with rolled joints and a dried cannabis bud to the left of the
flag.
Image source: Getty Images.
Adding up legal weed sales in Canada since legalization day
Of
course, dealing with a relatively nascent industry comes with its bumps
in the road. Although marijuana sales in licensed cannabis stores have
been on the rise for three consecutive months, through May 2019,
according to newly released data from Statistics Canada,
pot revenue is still lagging Wall Street's initial forecasts. Here's a
rundown of total licensed marijuana sales in Canada since recreational
sales began on Oct. 17, 2018 (Statistics Canada reports in Canadian
dollars, with U.S. dollar equivalency in parenthesis):
- October 2018: CA$53.68 million ($41.06 million)
- November 2018: CA$53.73 million ($41.1 million)
- December 2018: CA$57.34 million ($43.86 million)
- January 2019: CA$54.88 million ($41.98 million)
- February 2019: CA$51.66 million ($39.52 million)
- March 2019: CA$60.94 million ($46.62 million)
- April 2019: CA$74.58 million ($57.05 million)
- May 2019: CA$85.65 million ($65.52 million)
As
you can see from these figures, May was Canada's best month, with
licensed stores logging better than CA$85 million in revenue, or a
nearly 15% sequential quarterly increase from April.
On
an aggregate basis (i.e., in the 7.5 months since Oct. 17, 2018),
licensed cannabis stores have logged CA$492.46 million in sales ($376.71
million). Canada's recent double-digit sequential monthly sales progression
would suggest (in my best guess) that it has a shot to land between
CA$800 million ($612 million) and CA$900 million ($688 million) in
revenue in its first full year of sales.
Here's why Canada's recreational cannabis launch quickly lost its buzz
Although
Canadian cannabis sales are finally headed in the right direction, even
CA$900 million in first full-year sales would almost certainly be
considered a disappointment. This sales weakness can be specifically
traced to three factors.
A
sizable portion of the blame lands with regulatory agency Health
Canada, which has been absolutely bogged down by licensing applications
for cultivation, processing, and sales. Health Canada began the year
with over 800 licensing applications for review (mostly for
cultivation), but has approved fewer than 200 license holders since
2013. This can lead to cultivation and sales license wait times of
months to more than a year. Even with recently announced license application changes, it's going to take some time for Health Canada to work through this enormous backlog.
To
further build on this first point, Health Canada recently announced
that high-margin derivatives, such as vapes, edibles, and infused
beverages, won't be reaching licensed cannabis store shelves until mid-December, at the earliest. Previous expectations had these products hitting the market no later than October 2019, if not sooner.
The
second issue has been on the packaging side of the equation. There are
stringent rules regarding packaging and branding for cannabis products,
and ancillary players that provide these solutions simply haven't been
able to keep up with growing demand. This has left raw cannabis sitting
on the sidelines since there's a shortage of compliant packaging
solutions.
View photos
Flowering cannabis plants growing in an indoor farm.
Image source: Getty Images.
The third problem relates to the growers themselves.
None were particularly willing to outlay tens or hundreds of millions
of dollars to expand production capacity until they knew with certainty
that the Cannabis Act would become law. After all, Prime Minister Justin
Trudeau had been promising to legalize marijuana for years without any
real progress. With that near-certainty not coming until very late in
2017, it gave growers limited time to get their licensing in order and
complete construction of growing facilities.
Though
all of these issues are fixable, it will take time. That means a slow
and steady progression in sales should be expected in Canada, and not
the exponential surge that Wall Street had initially forecast.
Pot stock quarterly reports should improve, but not by much
While
it is encouraging to see licensed cannabis sales hit an all-time high
three months in a row, this slow-but-steady improvement isn't going to
be of significant help to the largest and most popular cannabis stocks,
such as Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB).
Canopy Growth is in the midst of a pretty substantial shake-up that saw its visionary co-CEO, Bruce Linton, get fired from his post after the company reported a whopping net loss of CA$670 million
in fiscal 2019. Linton's vision was always one of laying the
infrastructure needed to be successful globally and in the United
States. That meant spending aggressively and rewarding employees with
long-term-vesting share-based compensation. Unfortunately, this spending
pushed costs through the roof and looks to have cost Linton his job. As
a reminder, following Constellation Brands' CA$5
billion investment in Canopy, it netted itself a core position on
Canopy's board, allowing for the ability to push out Linton.
Canopy's
fiscal first-quarter operating results, which will cover the April
through June quarters, is not expected to show much in the way of sales
or margin improvement, according to the company and CFO Mike Lee. Canopy
Growth is fairly leveraged to the recreational side of the market,
which is where many of the supply issues mentioned earlier have stymied
sales. In other words, losses are expected to continue throughout 2020, and perhaps into 2021.
View photos
A person holding cannabis leaves in front of a globe of the Earth.
Image source: Getty Images.
Things
have been looking a bit brighter for Aurora Cannabis, compared to
Canopy Growth, but that's not exactly a ringing endorsement.
The
bright side for Aurora Cannabis is that its production expansion and
licensing look to be on track. Although a number of its larger
facilities are still under construction, it's the clear leader in annual
run rate output at north of 150,000 kilos, and should be on pace for at least 625,000 kilos of yearly run rate production
by the end of fiscal 2020 (June 30, 2020). Simply having the output
available will be a positive, although supply channels may still be
working out the kinks even a year from now.
Perhaps the biggest concern for Aurora Cannabis is its international strategy.
Don't get me wrong, international cannabis sales are the long-term
catalyst for Aurora. However, these overseas sales aren't expected to
really take off until domestic demand is satiated. Given the noted
supply and packaging problems, it could be some time before that
happens. This may relegate Aurora to yet another year of losses in 2020.
Obviously,
the cannabis space remains fluid and a lot could change between now and
even the next quarter. But as things stand at this very moment, pot
stocks could continue to disappoint in the interim on the back of weak
operating results.
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