Amid the stock market volatility over the past three weeks, you might have forgotten that it's also the thick of earnings season. This means that marijuana stocks will soon be lifting the hood on how well they performed in the quarter preceding the legalization of recreational weed in Canada.
Earnings season for pot stocks may also represent a fundamental shift in the way Wall Street and investors look at the industry. After all, with the green flag waving in Canada as of Oct. 17, 2018, the time for promises has ended. Investors are going to want to see tangible results that back up the astronomical appreciation in most marijuana stocks since the beginning of 2016.
So, what should investors expect from pot stocks in the current earnings season? Let's take a closer look.
Image source: Getty Images.
1. Expect higher sales, but understand that liftoff is still another quarter or two away
The first thing investors can expect is substantially higher sales totals from the prior-year period. I know... thanks, Captain Obvious.
But what you may not have taken into account is that current quarter sales aren't going to be accounted for by marijuana stocks until their January-to-March-released earnings reports. This means the sales figures investors will be seeing from marijuana stocks over the next few weeks to two months will likely be through the end of September 2018, prior to the legalization of recreational marijuana in Canada.
Nevertheless, revenue will climb substantially for some of the larger growers that have managed to move their product to international markets, as well as secured supply deals with Canadian provinces. For example, Canopy Growth Corp. (CGC 0.42%), which is expected to generate around 500,000 kilograms of weed annually at peak capacity and arguably has superior infrastructure in place to move its product, is expected to see sales soar by 419% from the prior-year period in its upcoming quarter. Canopy Growth will probably benefit from its numerous supply deals, but should see sales catapult much higher in the quarters to come.
Image source: Getty Images.
2. Don't be surprised if quite a few marijuana stocks report a profit
Secondly, investors shouldn't be all that surprised if marijuana stocks wind up reporting a quarterly profit during their upcoming quarter -- the reason being that publicly traded Canadian stocks are required to report their operating results in International Financial Reporting Standards, or IFRS.
A funny thing happens with agricultural companies under IFRS accounting. Namely, they have to account for the changing value of their biological assets (in this instance, cannabis plants). As cannabis plants grow and mature, their perceived value changes. What's interesting is that it's up to the growers themselves to estimate what this fair value is, and how much it'll eventually cost to sell their product. Mind you, this is all being done before a crop is finished growing, meaning there's some serious "guestimation" involved.
Adding more fuel to the fire, marijuana growers are able to determine where on their operating income statement they'll recognize this fair-value adjustment. The industry has chosen for it to be an above-the-line adjustment, meaning, in many instances, it's reducing cost of goods sold or even turning cost of goods sold positive. In plain English, these one-time adjustments, which could grow as cannabis stocks expand their capacity, may be responsible for some hefty per-share profits.
Image source: Getty Images.
3. Count on most marijuana stocks losing money on an operating basis
Finally, don't focus too much on those fair-value adjustments, because if investors were to strictly analyze sales and operating expenses, they'd see that pretty much all marijuana stocks are losing money.
On the one hand, there are pot stocks like Canopy Growth that'll be busy spending a lot of capital on expanding production capacity, brand building, marketing, and laying the foundation for international sales. Even with fair-value adjustments, Canopy Growth isn't expected to be profitable on a recurring basis anytime soon.
On the other side of the coin is a grower like Aphria (NASDAQOTH: APHQF), which is expected to be profitable on a full-year basis. Of course, this profitability is derived from its fair-value adjustments. If we remove these one-time line items, Aphria generated 13.3 million Canadian dollars in sales in its most recent quarter, but had CA$24.1 million in operating expenses, along with CA$4.8 million in production costs. That would represent an operating loss of nearly CA$16 million for Aphria, the projected third-largest grower by annual yield.
Investors should expect these operating losses to continue for at least the next couple of quarters.
