The Canadian cannabis stocks continue to trade near the yearly lows and the Cannabis 2.0 rollout can’t start soon enough. Unfortunately, Canopy Growth just confirmed the process isn’t going to be smooth or as quickly as the market expected.
Earlier this year, Canada regulators established the rules for the rollout of edibles, vapes, beverages and other cannabis products falling into the Cannabis 2.O category. Investors have big hopes for these products to provide cannabis stocks with a boost in revenues from product categories that won’t face the same competition from illegal sources.
The government organization allowed companies to submit products for license beginning October 15 with a 60-day review period providing an initial sales date of December 16. As Canopy Growth acknowledged last week, the products can’t be sold into the distribution channels until that day pushing the date before reaching store shelves until sometime in early January 2020.
As with the Cannabis 1.0 rollout last October, the Canadian market continues to face failure after failure in reaching aggressive sales targets. The market had originally expected Cannabis 2.0 products to be available starting mid-October and now most store shelves will remain empty until way into Q1.
In addition, these products will still lack vast distribution in areas like Ontario already holding back Cannabis 1.0 sales. In addition, provinces like Quebec are limiting 2.0 products while Newfoundland and Labrador aren’t allowing vapes. Investors need to consider that two key provinces are effectively limited at the initial Cannabis 2.0 rollout with Quebec limiting sales and Ontario still lacking stores.
We’ve delved into these four Canadian cannabis companies set to lead the market in the Cannabis 2.0 wave after the expected dominance of Canopy Growth:
Aurora Cannabis (ACB)
Aurora Cannabis is the other major player in the industry expected to have a wide selection of Cannabis 2.0 products ready when the market opens up in mid-December. The company plans to have a wider selection of edibles with chocolates, mints, cookies and gummies hitting the market in addition to a selection of vapes and concentrates.
The company arguably has the second-best Cannabis 2.0 lineup and interestingly avoided the beverages market out of the gate. Aurora Cannabis hasn’t had the same problems with recreational cannabis with returns like other leading companies so one might wonder if their placement in the edibles market over beverages isn’t a market signal.
With a market cap heading towards $3.0 billion, the stock is probably less reliant on a home run from Cannabis 2.0. Investors have bigger concerns about cash balances and any positive results from selling edibles definitely helps at the margins. The big benefit to Aurora Cannabis is to place the costly ramp up period in the rearview mirror, allowing the company to shift towards streamlining operations in order to generate profits.
TipRanks suggests caution has Wall Street fairly divided in its expectations on ACB. The stock currently has a Moderate Buy consensus rating, which breaks down into 5 "buy" ratings vs 4 "hold" and 2 "sell" ratings. (See Aurora's price targets and analyst ratings on TipRanks)
Organigram is coming off a rough quarter so any good news would be highly welcomed in this stock. The company isn’t the most aggressive heading into the Cannabis 2.0 launch, but a position in vapes and chocolates could be the best conservative play in an unclear market demand picture while conserving precious cash.
The company recently ran into problems with products returned from the Ontario Cannabis Store. Both THC oils and low THC dried flower failed to sell as expected and the lack of retail stores in Ontario didn’t help so a more conservative rollout of 2.0 products might be the smart move.
Organigram is taking a more cautionary move into these products with a focus on what was successful in U.S. due to a lack of actual knowledge on the desired products in Canada. The Canadian LP will have vape pens and edibles ready for sales to mirror the products most successful in the U.S.
Vape pens available in December will use the PAX Era platform and Edison pens from Organigram. In addition, the company has exclusive license to the Feather products popular in Colorado providing multiple solutions to attack the market.
As the market develops in Q1, Organigram will roll out chocolate products from their new $15 million production line. The company plans to pursue co-manufacturing and private labeling to fully utilize this new facility.
The company has additional plans for a powered beverage in Q2 to round out a complete Cannabis 2.0 lineup without rushing products out the door in December before the market matures and Ontario opens more stores. With a market value of only $400 million, the stock could see the biggest boost from a successful rollout of products like vapes and edibles.
All in all, Wall Street loves this stock, earning a stellar analyst consensus rating, as TipRanks analytics demonstrate OGI as a Strong Buy. Out of 8 analysts tracked in the last 3 months, all 6 are bullish on Organigram stock, while 2 remain sidelined. With a return potential of over 130%, the stock's consensus target price stands at $6.21. (See Organigram stock analysis on TipRanks)
Tilray is the wildcard in the Canadian cannabis sector. The company is relying on wholesale supplies to fuel a Cannabis 2.0 lineup that initially includes CBD beverages, edibles and vape products.
Tilray will utilize their High Park Holdings business to lead the rollout of new products including beverages. The company will bring existing U.S. brands of Marley Natural and Goodship to Canada along with other new brands like The Batch, Chowie Wowie and Rmdy. The portfolio will include vapes, cannabis-infused baked goods, gummies and oils.
The most focus is naturally on the joint venture with AB InBev (BUD) named Fluent Beverage Company. A major distribution partner in the beverage space is a big feather in the cap of Tilray, yet the company is still lacking a THC product from the start. In addition, the JV is only 49% owned by Tilray so the sales won’t be consolidated on the income statement. Investors expecting a big sales boost might be disappointed with the quarterly results.
The company has a market cap of $1.8 billion and quarterly revenues are still making a slow ramp. Analysts only target March quarterly revenues of $65 million, a $10 million boost from the prior quarter. Over time, the hidden value in the stock could come from the Fluent Beverage JV.
According to TipRanks, the consensus on Wall Street is that Tilray stock is a “hold” for investors. But TipRanks might as well have said “buy” — because analysts, on average, think the stock, currently at $18.99, could zoom ahead to $26.50 within a year, delivering 39% profits to new investors. (See Tilray's stock-price forecast and analyst ratings)
Canopy Growth (CGC)
Canopy Growth is the expected leader in the Cannabis 2.0 phase along with all of the U.S. listed Canadian cannabis stocks. Most of the partnerships and direct investments from global firms were for the new product forms such as beverages.
The company has held several media and analyst events to prime the investor community on the products hitting the cannabis market on December 16. Canopy Growth has a broad depth of products in the beverages, vapes and chocolates categories, but the company does appear lacking in amount of different product categories with no gummies or other edibles.
Considering the Constellation Brands (STZ) investment and the large beverage capacity from the new Smith Falls facility, one shouldn’t be surprised the company has a wide selection here. Canopy Growth plans to offer ten ready-to-drink products and three purely distilled cannabis drinks with multiple flavors and mg levels of both THC and CBD.
The problem for the stock is that their beverages and vapes won’t reach stores until early January. The benefit to the current December quarter won’t occur and the new CEO from Constellation Brands doesn’t start until January 14. The company faces a ton of disruption in the next month or so that will impact short-term results.
Canopy Growth has a market value of $6.5 billion and a lot of value is based on the Constellation Brands deal and the related breath of beverage offerings. A failed uptake of THC and CBD infused beverages would seriously damage the value of a stock with a business generating quarterly EBITDA losses of C$100 million and needing a new winning strategy to turnaround the prospects of the company.
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