Why the next quarter could be tough for Canadian cannabis companies

For many stocks of Canadian jars, sales growth is no longer a given. Now that the industry is more developed and there are more competitors, companies are more and more aggressive in their efforts to increase their turnover, for example by introducing value brands to fight against sales. the illegal market and their competitors. But that only exacerbates another problem in the industry: a lack of profitability. Many pot producers in Canada are in the red.

It’s a tough time to invest and own shares of Canadian cannabis companies. Unlike their American counterparts, their market is not as large and it is already completely legal, so completely new parts of the country are not suddenly opening up for business. And with the lockdowns still affecting the market, there could be more pain in the short term for cannabis investors who decide to hang on to Canadian pot stocks.

Image source: Getty Images.

Why the next quarter might be difficult

Home orders in the midst of the pandemic are not a new challenge for the industry. But what could make matters worse for pot growers is that in May, the Ontario Cannabis Store (OCS) said it would accept fewer deliveries in its effort to reduce the number of COVID cases. 19. Although she has stated that she will still receive orders, the volume she will process will be lower.

All legal pot stores in Ontario go through the OCS, so if its volumes are down, there will be less product the stores can accommodate. And to make the problem worse, stores aren’t ordering as much as consumers can’t shop in-store. The good news is that stay-at-home orders in Ontario have been completed since June 2 and the province is beginning its plan to reopen. Unfortunately, the damage can be done for the coming quarter, which will include the month of May.

For Canadian pot growers, Ontario is simply too big a market to ignore. In March 2021 (the most recent month for which data are available), retail sales totaled C $ 298 million for all of Canada. Of this total, Ontario accounted for more than a third with C $ 103 million. And that’s a bigger percentage than a year ago now that it opened more stores:

March 2021 March 2020
Province Sales % from Canada Sales % from Canada
Ontario $ 103 million 35% $ 47 million 26%
Alberta $ 59 million 20% $ 40 million 22%
Quebec $ 48 million 16% $ 38 million 21%
British Columbia $ 41 million 14% $ 24 million 13%

Data source: Statistics Canada. All figures are in Canadian dollars.

The country’s top four provinces accounted for 85% of revenue in March 2021 compared to 82% a year ago. But the big difference: Ontario captures a bigger slice of the pie and is a more crucial part of industry growth in Canada. So even a low month for the OCS could have crippling effects on the industry and any pot producer who sells their products in the province.

Should You Sell Canadian Pot Stock?

Canopy growth (NASDAQ: CGC) released its latest earnings report on June 1. Its sales of C $ 148 million for the period ending March 31 were up 38% year-over-year, but down 2.7% from the C $ 153 million reported during the previous period. And this despite cannabis sales in Canada totaling C $ 840 million in the first three months of the year, 1.8% more than the C $ 825 million reported in the last three months of 2020.

If the company fails to find a way to increase sales in an improved quarter, there won’t be much hope until the next quarter, in the middle of May. problematic, things are going better. As Canopy Growth is in the midst of a transition and tries to move closer to profitability (it reported a loss of Adjusted EBITDA of C $ 94 million in the last quarter), driving consistent revenue growth has long been a challenge. problem for the company that goes beyond the quarter. And other companies are facing similar problems, as a rival Aurora Cannabis remains unprofitable and its revenues for the same period totaled C $ 55 million, down 18% from the previous quarter.

For cannabis investors, the safest game is certainly to invest in US-based pot stocks. Although they operate in quasi-legal environments where their operations are legal within individual states but not at the federal level, they are in no danger of going out of business. In addition, there are many growth opportunities, especially with the upcoming opening of the New Jersey and New York recreational markets.

Not only do they play better in the short term, there is also a lot more potential in the long term. By 2025, the U.S. market could be worth as much as $ 34.5 billion, according to BDSA estimates. The Canadian market will be almost a sixth the size at just $ 6.1 billion. If you are a growth investor, the US pot market presents a much more attractive investment opportunity.

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David Jagielski has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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