I am a numbers person and am always pouring through data. The numbers I keep coming up with are that Canada is always going to be short on supply for cannabis. On the first day of legal adult-use cannabis sales, the entire country ran out. While that can be dismissed as initial buzz, there are still supply concerns as Canopy Growth’s (CGC) Bruce Linton has pointed out. My expectation is that continued pressures are going to be met with higher revenue and growth rates of companies involved in cannabis sales.
Canopy Growth’s stock is moving higher since the late October sell-off in pot stocks:
In a conference call, CEO Bruce Linton highlighted the three major focuses the company now has:
- Hiring the best people
- Optimal Capital Expenditures
- Allocation of the scarce amounts of cannabis
Linton pointed out that the company sold some 8,228 kg. of cannabis in the company’s third quarter which included sales of recreational cannabis. This was up from 2,330 kg. of cannabis which was primarily to medical sales.
Canopy Growth now has to resort to prioritizing their limited supply based upon demand. Cannabis sales will go to these four demands in this order:
- Scientific research
- Medical sales
- Recreational sales
The problem with this is that there is an expectation that some $5 billion in adult-use recreational sales in Canada occur in the first year of sales. Canopy Growth is one of the biggest suppliers of cannabis in the world with about 500,000 kilograms of production annually. Most of these facilities are coming online at the very beginning of this year and sales should start to show up in the next quarters of the company’s financial statements.
There is a lag of approximately 3-6 months before sales can commence with cannabis due to the “seed-to-weed” factor where a plant has to start from seed and grow to the bloom stage before the company can sell the product. By the end of the year, my expectation is that Canopy will achieve full capacity and, Canopy will see some $2.5 billion in revenue from its sales. Until that time, however, there will be pressures on supplies (other companies in the industry are having the same supply constraints).
This is actually good news for investors. The country has inserted the government into the supply chain and all of the dispensaries are government regulated, controlled or owned in some fashion or another. As such, price is determined by supply and demand factors. Because of the limited supply there will be long-term pressures on prices upward allowing producers to maintain high gross and net margins.
Canopy Growth is sitting on some $4 billion in cash the company received via a major investment from Constellation Brands (STZ) just a few months ago. The company has all the working capital it needs to expand in any manner it deems appropriate. From that, Canopy Growth is well capitalized and will be able to expand as they see fit.
The entire industry is expected to be a $500 billion industry that disrupts several other industries such as liquor, tobacco and pharmaceuticals. Canopy Growth is very well positioned to capitalize on this potential. This industry will see tremendous growth opportunities over the years. I am long Canopy Growth and high expectations for the company given their cash position and the future outlook of the industry.
Check out the articles in this category focused on cannabis stocks. By gaining a strong foundation in both the fundamentals and technical details usually involved in cannabis stocks, you’ll be able to invest with greater confidence.
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