There's no denying that the marijuana industry is growing like a weed. The legalization of recreational marijuana in Canada is big news, and it clearly puts the cannabis industry on the map as a high-growth and viable business model. According to various Wall Street estimates, the legal industry in Canada could see around $5 billion in added annual sales from adult-use pot within a matter of years.
Of course, the expectation of rapid sales growth and (eventual) strong profitability has sent nearly all marijuana stocks soaring. The question is, with recreational cannabis now legal in our neighbor to the north: "Can these pot stocks live up to expectations when it comes time to report their operating results?"
Following earnings releases from all seven of the projected top producers over the last month, the early indication isn't very encouraging.
A rundown of Canada's projected top cannabis producers
As a brief rundown, here are the marijuana stocks expected to lead in annual weed output once at full capacity:
- Aurora Cannabis ( ACB -6.39% ): Following its acquisition of ICC Labs in South America, Aurora has a genuine shot at producing around 700,000 kilograms a year, making it the clear leader in aggregate annual output.
- Canopy Growth Corp. ( CGC -7.19% ): Canopy Growth hasn't exactly dished on its peak production potential, but with 5.6 million square feet of growing space that it aims to license, somewhere around 500,000 kilograms per year seems reasonable.
- Aphria ( APHA ): Aphria is expected to get the majority of its production from two projects -- its organic Aphria One project and its partnered Aphria Diamond development -- and should slide in as No. 3 in annual yield with 255,000 kilograms.
- Tilray ( TLRY ): It's anyone's guess at this point what Tilray's peak production capacity will be, but based on the approximately 850,000 square feet of growing space expected to be complete by the end of 2018, and its nearly 3 million square feet of expansion potential, somewhere between 200,000 kilogram and 225,000 kilograms annually seems about right by late 2020 or 2021.
- The Green Organic Dutchman ( TGOD.F 3.09% ): Despite having not made a single sale yet, The Green Organic Dutchman projects 195,000 kilograms in annual yield when at full capacity. Nearly 80,000 kilograms of this output came from a partnership and acquisition-spree in June.
- Auxly Cannabis Group ( CBWTF -7.98% ): Auxly Cannabis is an interesting case, because some of its output is received via royalty interests, whereas other aspects are wholly owned grow facilities. In total, the company expects to peak at around 170,000 kilograms of cannabis per year.
- Cronos Group ( CRON -7.06% ): Rounding out the prospective top-7 producers is Cronos Group. With its July announced joint venture, known as Cronos GrowCo, I estimate it to have doubled its peak production capacity to 140,000 kilograms a year.
Brand-name growers lost a lot of money in their recently ended quarters
That's close to 2.2 million kilograms of production just from these seven industry mammoths. Unfortunately, the high costs associated with capacity expansion, brand building, marketing, product diversification, and acquisitions took their toll in the most recently reported quarter. Removing a number of one-time benefits and expenses, here's how the seven pot stocks performed on an operating basis. Please note that all figures are in Canadian dollars:
- Aurora Cannabis: CA$111.9 million loss
- Canopy Growth: CA$214.6 million loss
- Aphria: CA$10.4 million loss
- Tilray: CA$26.3 million loss
- The Green Organic Dutchman: CA$9.8 million loss
- Auxly Cannabis Group: CA$10.3 million loss
- Cronos Group: CA$4.9 million loss
Adding this up works out to just over CA$388 million in aggregate losses, or just shy of $300 million U.S. on an operating basis. That's more than $1 billion in extrapolated losses on an annual basis from an industry that investors are absolutely enamored with.
It's going to be a while before pot stocks are seeing green
The grim reality for marijuana stocks is that it's probably going to take a number of quarters, even with rapid sales growth, before they're profitable on an operating basis.
Capacity expansion will remain a key expense for these top-tier growers. Despite its pathway to the top, Aurora Cannabis noted in its press release that it's currently producing at a run rate of 70,000 kilograms per year. That's perhaps 10% of what the company is ultimately capable of given what assets it has in its production portfolio. Then there's The Green Organic Dutchman, which won't even make its first sale until the first half of next year.
Product differentiation is also driving costs higher. Dried cannabis has proven to be a commoditized product in select U.S. states where it's legalized recreationally, and the same fate likely awaits the Canadian cannabis industry. Thus, growers are spending liberally to develop new products. For example, Aphria is constructing an extraction center that'll be able to produce 25,000 kilogram-equivalents of concentrates when fully up to speed. It's worth noting that vapes, edibles, cannabis-infused beverages, and concentrates aren't yet legal in Canada, but they are expected to become legal sometime in 2019.
Acquisitions are another reason costs could be high. Even though these are generally cash-rich companies, financing for the weed industry has proven challenging up to this point. Therefore, most acquisitions are being conducted as all-share or cash-and-stock deals -- the latter of which usually has a small cash component. The use of shares in acquisitions, and to reward employees or retain talent, will drive costs up.
It's time for investors to face the facts: Marijuana stock profits are going to be elusive for a while.