The countdown is on.
In just 10 days, the global cannabis industry will be dramatically reshaped. On Oct. 17, Canada opens the market for the legal adult use of recreational marijuana. The impact from the first major economic power to allow recreational marijuana on a nationwide level will be enormous.
Dozens of companies that have previously supplied only medical cannabis in Canada anticipate a surge in revenue. But with the big day drawing close, there are three stocks that could be the biggest winners of all: Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (NASDAQOTH:APHQF).
1. Canopy Growth
Canopy Growth already ranks as a top producer of medical cannabis in Canada. The company is poised to carry that success over to the country's recreational market as well. How will Canopy do it?
First, Canopy has a huge production capacity. The company claims more than 3.2 million square feet of growing space, although that total includes some facilities outside of Canada. Second, Canopy has secured supply agreements with every province and territory that has announced supply plans. Capacity plus outlets for that capacity equals increased revenue for Canopy.
The company also has a great opportunity that won't be available on Oct. 17. Canopy and partner Constellation Brands plan to launch a variety of cannabis-infused beverages. They'll have to wait until 2019, though, because Canada won't allow the sale of these products until regulations are finalized next year.
2. Aurora Cannabis
Aurora Cannabis has had a case of the munchies over the last couple of years. The company has gobbled up other marijuana growers like it's going out of style, including the acquisition of one of Canada's largest cannabis producers -- MedReleaf.
All of this business-development activity has positioned Aurora to be a major player in the Canadian recreational marijuana market. The company expects to have an annual production capacity of 150,000 kilograms by the end of 2018. As it completes other expansion efforts, that capacity should jump to more than 500,000 kilograms per year. Like Canopy, Aurora also has supply agreements in place with provinces and territories across Canada.
Aurora could get another boost in October that doesn't stem from the opening of the Canadian recreational marijuana market. The company plans to soon list its stock on a major U.S. stock exchange. This move will give Aurora more exposure to the U.S. investor community at a great time to gain visibility.
Like Canopy and Aurora, Aphria is sitting pretty when it comes to production capacity. The company is on track to be able to produce 225,000 kilograms of cannabis per year by early 2019. Aphria should edge out Tilray to rank as the No. 3 marijuana grower in terms of capacity.
Finding buyers for its capacity shouldn't be a problem. Aphria has supply agreements in place with all 10 Canadian provinces plus another agreement with the Yukon Territory. In addition, the company recently signed a deal with Emblem Cannabis to supply 175,000 kilograms of cannabis over a five-year period beginning in 2019.
Aphria, like Aurora Cannabis, has been listed as a top prospect as a cannabis partner for a major beverage maker. Coca-Cola was reportedly interested in Aphria before turning its attention to Aurora. Perhaps the most likely partner for Aphria, though, is Diageo. Lining up a major partner could enable Aphria to make a big splash in the cannabis-infused beverages market next year.
While the remaining days before Canada's recreational marijuana market opens will go by quickly, there's one big question on investors' minds: Just how high will demand really be? Some predict tremendous demand with supply shortages -- at least right out of the gate. Others aren't so optimistic.
Arcview Market Research and BDS Analytics took a very analytical approach with projecting the Canadian marijuana market size. They think that the recreational market will be around $2.1 billion next year with another $600 million for medical cannabis. If these estimates are relatively accurate, Canopy Growth, Aurora Cannabis, and Aphria are likely to see their revenue skyrocket.
However, a quick look at the companies' market caps shows that expectations of sky-high growth are already baked into the stocks' prices. For Canopy, Aurora, and Aphria to justify their premium valuations, they'll need to significantly increase sales outside of Canada as well.
Oct. 17, 2018, will be a big day. But it probably won't be big enough.