A decade or two from now, we may look back upon legal cannabis as the greatest growth story of our generation. Having recorded $10.9 billion in worldwide revenue last year, the legal weed industry is on track for a compound annual growth rate of more than 24% through 2024, according to Arcview Market Research and BDS Analytics.
For those of you keeping score at home, we're talking about $40.6 billion in global annual sales by 2024 just in licensed stores. This doesn't even factor in the pharmaceutical cannabinoid revenue and general-store sales of cannabidiol products that could push this sales total even higher. Suffice it to say, marijuana is sort of a big deal on Wall Street, and the huge returns in pot stocks since the beginning of 2016 prove that point.
Canada's legal weed revenue soared in April, but that's not saying much
Unfortunately, the launch of legal cannabis in Canada hasn't quite been what Wall Street, investors, or Canadian pot stocks had in mind.
Each month, Statistics Canada releases retail data for a variety of Canadian industries, which now includes cannabis stores. Since cannabis is a highly regulated market, the revenue data reported to Statistics Canada is considered to be extremely high quality and very accurate. Here's a rundown of total licensed pot sales in Canada since recreational sales began on Oct. 17, 2018 (all figures reported in Canadian dollars, with U.S. dollar equivalency in parentheses):
- October 2018: CA$53.68 million ($40.67 million)
- November 2018: CA$53.73 million ($40.71 million)
- December 2018: CA$57.34 million ($43.44 million)
- January 2019: CA$54.88 million ($41.58 million)
- February 2019: CA$51.66 million ($39.14 million)
- March 2019: CA$60.94 million (S46.17 million)
- April 2019: CA$74.67 million ($56.57 million)
As you can see, sequential monthly sales growth hit almost 23% in April, and it was by far the best single month of marijuana sales to date in Canada.
Still, these figures gave way to disappointment. Even with pot revenue at an all-time high in April, aggregate revenue over the first 6.5 months of sales is just $308.28 million, which is well off of the $5 billion that the Canadian pot industry is aiming for in annual sales just a few years after launch.
A trio of reasons for weaker-than-expected Canadian pot sales
Why have things been such a mess? First, you can go ahead and give Health Canada a finger-wag.
Health Canada, the agency responsible for overseeing the legal weed industry, has been absolutely inundated with cultivation, processing, and sales license applications. As of January, Health Canada was contending with a backlog of nearly 840 licensing applications, many of which were for cultivation, after having approved fewer than 200 applications since 2013. It takes many months, if not years, to review cultivation and sales license applications, and as a result, a number of cannabis producers have been penalized by having to wait patiently for the go-ahead to grow, harvest, and sell their marijuana.
For what it's worth, Health Canada does have a plan to work through this backlog. In May, the agency announced that cultivation license applications would only be considered if a grow farm was complete. This should help to eliminate underfunded grow sites and expedite the review of the nation's larger producers that can make a real dent in the current cannabis shortage.
Another problem has been compliant packaging shortages. With Health Canada laying out a host of guidelines that growers and retailers would need to follow in order to get marijuana products onto retail shelf space, there simply haven't been enough compliant packaging solutions in the early going. Instead, unfinished cannabis has been left waiting on the sidelines for processing until there are sufficient packaging solutions in place.
Lastly, the marijuana growers themselves deserve some of the blame. Pot growers in Canada were unwilling to invest a lot of money in capacity expansion until they were absolutely certain that the Cannabis Act would become law. This certainty wasn't in place until less than a year before recreational weed sales commenced. Therefore, many pot stocks are still in the process of building out capacity and are nowhere near able to meet domestic demand.
With problems persisting, marijuana stock sale and profit projections should be cut
Even though it's pretty evident that the legal marijuana industry has a solid future, that optimism should be tempered for the time being. It's unlikely that Health Canada's fix for the license application backlog will be resolved anytime soon, and it could be another year before major growers are operating at or near full capacity.
What's more, Health Canada announced a little over two weeks ago that the launch of derivative products (e.g., edibles, concentrates, vapes, topicals, and nonalcoholic infused beverages) would be late. Although new regulations governing derivative products would, indeed, begin on the one-year anniversary of adult-use marijuana's launch in Canada (Oct. 17), derivative products would be rolled out slowly and are unlikely to make it onto dispensary store shelves before mid-December 2019 at the earliest.
This all means one thing: Pot stock sales and profit projections are coming down.
For example, profit projections for the three most popular cannabis stocks in the world -- Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), and Cronos Group (NASDAQ:CRON) -- have been falling precipitously for months.
As recently as February, Wall Street's consensus was for Canopy Growth to earn CA$0.08 per share in fiscal 2020. That's now turned into a consensus loss of CA$0.42 per share for Canopy, which may grow even wider after the company reported a bloated net loss of CA$670 million for fiscal 2019. Canopy Growth may very well be the last of the major growers to push into recurring profitability.
Likewise, Aurora Cannabis was fitted for a CA$0.12 per-share profit in fiscal 2020 by Wall Street as of February. However, Aurora's acquisition-heavy strategy and the newly announced delays to the launch of high-margin derivative products (a problem given that Aurora focuses on the medical marijuana market) have pushed its 2020 consensus on Wall Street to a loss of CA$0.06 per share.
As for Cronos Group, Wall Street was looking for a CA$0.15 per share full-year profit for 2020. But given the company's very slow rollout of product and now the delay in launching vapes, those estimates have fallen by two-thirds on Wall Street to a profit of only CA$0.05 per share in 2020.
Long story short, marijuana stocks can be winners over the long run, but a smooth launch and hyperbolic ascent aren't going to happen. Adjust your expectations accordingly.