Is the grass greener on the other side?
When Canada became the first industrialized nation and the second country in the world after Uruguay, to legalize and regulate recreational cannabis in October 2018, it became the world’s benchmark on how to enable a commercial cannabis market. Countries around the world are closely observing Canada and exploring whether they should make similar adjustments to their narcotics laws. Legal US and Canadian weed companies are seeing soaring revenues from their recreational and medicinal cannabis investments. Many governments are noting the plant’s lucrative potential for commercialism and hence tax revenue.
The chart below forecasts steady growth in the US cannabis industry revenue. Should the legalization of cannabis continue to spread across the US, as is widely expected, then revenues are likely to grow even quicker.
Cannabis legalization is the new trend
In the US support for cannabis legalization, this year hit an all-time high with nearly two-thirds of Americans favoring broad recreational legalization. Eight years ago, medical cannabis was legal in only 17 states and the District of Columbia, while at the same time recreational marijuana wasn’t legal at all. Today, medical marijuana programs are on the books in 33 states, and now 10 states allow some recreational use to some degree. Cannabis edibles legalization adds to this potential. The take-home point is that the cannabis industry is quickly being legalized, and this should allow well-established cannabis companies to rapidly grow their businesses.
Three billion dollar cannabis companies to consider
Aurora Cannabis Inc. (TSX: ACB | NYSE: ACB) is a Canadian based medical cannabis company that has a current production capacity of 150,000 kilograms annually and is expected to reach 625,000 kilograms on an annual basis by December 31, 2020. Aurora Cannabis is not yet profitable but revenue is forecast to rise 4.9 fold from an estimated C$273 million in 2019 to C$1,337 million by 2021, leading to a forecast C$183 million operating profit by 2021 (C$163 million net profit). Aurora Cannabis Inc. has an analyst’s consensus price target of C$14.67 (25% upside) and has a market cap of C$ 11.9 billion. Aurora is certainly not cheap, but they are in a dominant market leading position.
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Aphria Inc. (TSX: APHA | NYSE: APHA) produces and sells medical cannabis in Canada and internationally. The Company offers sativa, indica, and hybrid medical marijuana products, as well as cannabis oils. The Company serves patients and health professionals, as well as selling their products online. Aphria is not yet profitable but revenue is forecast to rise over 5 fold from an estimated C$226 million in 2019 to C$1,179 million by 2021, leading to a forecast C$138 million operating profit by 2021. Aphria Inc. has an analyst’s consensus price target of C$16.78 (82% upside) and a market cap of C$ 2.3 billion.
The Green Organic Dutchman Holdings Ltd. (TSX: TGOD | OTCQX: TGODF) produces organic cannabis products, including organic dried cannabis, cannabis oils and edibles, fresh cannabis, and seeds for medical applications in Canada. For the quarter ended March 31, 2019, the Company reported revenues primarily from HemPoland of $2.4 million, a 28% increase over the prior quarter. The Company is about producing organic certified cannabis, using different biological systems more complex than traditional growing methods. The Green Organic Dutchman has a market cap of C$ 1.07 billion.
As shown below, the worldwide use of cannabis is very extensive and not likely to slow down any time soon.
The good news for investors is that many politicians worldwide are beginning to see the tax windfalls enjoyed by trailblazers such as Canada and the legal US States. This is most likely causing a global attitude shift towards legalization of cannabis by many governments. This can only help benefit the industry.
The bad news for newer investors is that the sector has been a star performer the past year and prices and valuations have run up significantly. For example, Aurora Cannabis is up a massive 73% year to date and 48% in the past year. The potential is there to run further as the sector continues to grow, but some caution will be needed as sharp pullbacks can occur if growth stalls.
It is definitely an exciting time for the cannabis sector and investors; however looking ahead investors will need to study the fundamentals carefully and not just rely on “potluck”.
Matthew Bohlsen holds a Graduate Diploma in Applied Finance and Investment (similar to CFA), and a Graduate Diploma in Financial Planning. He has 30 years ... <Read more about Matthew Bohlsen>