It’s not often you get to witness the opening of a whole new market sector. After last year’s move by the Canadian Parliament to fully legalize marijuana and cannabis products throughout the country, and the increasing numbers of American states south of the border pursuing similar legalization policies, we are seeing just that. As Giadha Aquirre de Carcer, CEO of New Frontier Data, put it in a report on the worldwide cannabis market, “The legal cannabis industry has truly gone global; even in the face of extensive prohibition, cannabis consumption grows, and attitudes and challenging perceptions about the typical cannabis user continue to shift.”
It’s an exciting time, one that is also opening new pathways for investment. In this article, we’ll dip into the TipRanks database to look at four companies that have generated headlines in recent months. All four are well on the way to establishing themselves as players in the cannabis sector, but each one is following a separate path to success.
Aurora Cannabis, Inc. (TSE:ACB)
Aurora is staking its future on size, positioning itself as the world’s largest supplier of cannabis products to the medical market. And large is definitely the right word – Aurora’s current production stands at more than 25 metric tons per quarter, and is on track to exceed 600 tons annually by the end of 2020.
The company’s scale has brought Aurora both benefits and costs. On the positive side, Aurora gains economies of scale. High-volume production provides a higher revenue stream, and open doors to bulk customers that are unavailable to smaller producers. This was clear in last month’s quarterly report, which showed a 367% year-over-year gross revenue increase, and a 99% quarter-over-quarter increase in production. The cost to the company was clear, however. Aurora reported a loss of $158.4 million Canadian, coming out to 16 cents per share.
The operating loss, despite the production and revenue increases, stems from the company’s heavy investments in increased acreage and growing facilities. Management expects that the benefits of those investment – in higher production and lower costs per unit sold – will outweigh the costs and begin generating positive earnings by Q4.
Early last month, five-star analyst Martin Landry (Track Record & Ratings), GMP FirstEnergy’s expert on the consumer health sector, weighed in on Aurora, saying, “Data tracking dried flower inventory availability for online recreational cannabis stores in Ontario, Quebec and Alberta, or about 73% of the Canadian population, found that Aurora has been best performer with a more than 25% share of in-stock SKUs since the start of the year.” Landry expects that Aurora will become the industry leader, building on that strong presence. He gives the company a price target of $15 Canadian, suggesting an upside of 48%.
Overall, Aurora gets a ‘Strong Buy’ from the analyst consensus, based on 6 buys and 1 hold given over the past three months. The company’s average price target, $14.33 Canadian, and current share price, $10.13 Canadian, give an upside potential of 41%.
Canopy Growth (TSE:WEED)
Like Aurora, Canopy is a giant in the cannabis industry. By market cap, it’s the largest company in the sector, and has the second highest production – a reversal of Aurora’s numbers. And while Aurora is positioning itself to supply the medical market, Canopy has put itself squarely in the recreational segment of the cannabis field. In a widely publicized move at the end of last year, Canopy was partially acquired by Constellation Brands (STZ), the alcohol giant that owns two of Mexico’s largest beer brands.
Canopy is also investing heavily in future production and the American market; the company is scheduled to approve an acquisition deal with US grower Acreage on June 19. The move, in which Canopy will put down $300 million for rights to finish the purchase “if and when” the US Federal government legalizes marijuana nationally. The move will give Canopy an ‘in’ for the US market, when restrictions on interstate trade are lifted.
Looking at the two acquisition plans together, it’s clear that Canopy is eyeing the American recreational cannabis market. Even if the Federal government does not legalize marijuana any time soon (putting the Acreage deal on hold), Canopy’s partnership with Constellation Brands gives it a chance to develop cannabis infused beverages with a line on distribution networks in the US and worldwide.
Writing from Alliance Global Partners, Aaron Grey (Track Record & Ratings) points out that Canopy’s Acreage deal, should it be approved, will position Canopy to take the lead in the US cannabis market, the world’s largest. He also points out the importance of the company’s profitable base in Canada’s recreational market: “[While we do] not foresee Canopy being profitable until FY21, expect the company to be profitable in the Canadian cannabis market as it continues with its international expansion.”
Canopy’s size – in production and market cap – along with its profitable Canadian base business, underlies its "Moderate Buy’ analyst consensus rating. In the last three months, Canopy has received 6 buy ratings and 4 holds. WEED shares sell in Toronto for $55 Canadian; the average price target of $80 Canadian gives the stock a 45% upside potential.
Charlotte’s Web Holdings (TSE:CWEB)
The US state of Colorado has been a leader in the cannabis legalization movement, making it a natural home for US cannabis companies. Based in the city of Boulder, Charlotte’s Web recently up listed to the Toronto Stock Exchange, making it the first American cannabis company to do so. The company’s niche – hemp-based cannabidiol (CBD) extracts and products – while not fully legal under US Federal law, is more widely accepted at the state level than THC-derived cannabis products and can be sold online in the United States.
CBD products, in both the consumer health and prescription markets, are growing increasing popular in the US. Charlotte’s Web has capitalized on that, and now has a presence in over 6,000 retail locations around the country, and is seeing increasing business online. In response to increasing demand, the company has ramped up its production capabilities, and is now growing on double its 2018 acreage. Management expects to produce in excess of 500 metric tons of hemp and hemp products this year, and predicts that revenue will double to $145 US.
Charlotte Web’s greatest advantage, however, is not the popularity of its product or the increasing demand and production. Rather, it’s that the company is already profitable. After its IPO in 2018, the company generated earnings of 16 cents per share, and that number is expected to hit 33 cents this year and 75 cents in 2020.
Jason Zandberg (Track Record & Ratings), five-star analyst with PI Financial, notes all of this in his recent review of CWEB stock. He points out, “CWEB has now shipped first orders to three national brand supermarket/grocery and drugstore retailers in select states, with shipments to a fourth commencing post-Q1. Also, e-commerce sales, which accounted for 49 per cent of total sales in the quarter, grew by 60 per cent year-over-year…”
Zandberg sees CWEB generating 2019 revenues of $142.9 million, in line with the company’s guidance, and predicts that 2020 revenues will exceed $300 million. Building on these upbeat forecasts, he sets a price target of $30 Canadian for CWEB shares, suggesting an upside of 102%.
His target for the stock is only slightly more optimistic than the conventional wisdom. The average price target on CWEB in Toronto is $29.50 Canadian; with a share price of $14, this gives the stock a 98% potential upside. The analyst consensus, a ‘Moderate Buy,’ is based on 2 buy ratings.
GW Pharmaceuticals, Plc. GWPH
The last article in today’s look at cannabis market leaders is also an early entrant to the field, and the only one to trade on the US markets. GW Pharma formed in the UK, in 1998, to conduct research into medical uses of both CBD and THC, the main active compounds in cannabis. Last year, the company received approval for its cannabis-based epilepsy drug, Epidiolex. Sativex, a treatment for symptoms of MS, has been on the markets since 2010.
GW’s niche in the cannabis world is a bit unique. It’s not going for the recreational market at all, nor is it interested in the consumer health sector. It is a traditional pharmaceutical company, that saw the potential for cannabis-based prescription medications early on, and is now reaping the benefit of that very early entrance to the field.
In its last quarterly report, GW publicized the results of the Epidiolex launch. Writing from Piper Jaffray, Danielle Brill (Track Record & Ratings) said, “GWPH continues to deliver. We think the growth trajectory will continue over the coming quarters given expected EU launch, ongoing dose-titrations, increasing penetration into adult population, transition of remaining expanded access program patients to commercial product, and expansion into new indications.” Her $210 price target on the stock (a 13% boost from her previous target), suggests an upside of 22%.
Paul Matteis (Track Record & Ratings), of Stifel, also sees a bright future for the company. Writing of the Epidiolex approval and initial sales, he points out both the forecast-beating profits and management’s prudent words of caution: “GW reported an extremely strong 1Q with $33.5M in Epidiolex sales, consensus was ~$16MM. While the 600%+ q/q rev growth rate was spectacular, management was careful to remind investors that the quarter benefited from ~5 months of pent-up demand and patient-finding efforts.” Matteis gives GWPH a ‘Buy’ rating with a target of $227, or a32% upside from current levels.
GW Pharmaceuticals has a unanimous analyst consensus of ‘Strong Buy,’ based on 10 buy ratings. The stock is trading for $170, and the average price target of $219 gives an upside of 28%.
Find out more about these four leading cannabis stocks, and many more, with TipRanks’ Stock Comparison Tool.