Unlike many Canadian cannabis producers, OrganiGram Holdings (NASDAQ:OGI) is beating the broader market so far in 2019. But the year-to-date gain of more than 38% for the stock is still well below the triple-digit-percentage jump for OrganiGram earlier this year.

Previous performance doesn't matter very much when it comes to how well OrganiGram might fare in the future. Is this pot stock still a smart pick for long-term investors? 

Cannabis leaf inside a miniature shopping cart on top of a pile of cash.

Image source: Getty Images.

Market potential

The single most important determinant for OrganiGram's future success is just how big the global cannabis market can grow. You'll hear some cannabis industry executives talk about a $150 billion potential market. That number stems from a United Nations estimate of the illegal worldwide cannabis market size. Getting to a $150 billion market assumes that marijuana will become legal everywhere it's currently illegal. Maybe that could happen, but it will take a long time.

Another more realistic projection comes from Statista, which estimates that the global legal cannabis market will grow from $20.1 billion in 2018 to $63.5 billion by 2024. This figure is in the ballpark of the $66.3 billion global cannabis market in 2025 predicted by Grand View Research.

However, this estimates don't include hemp-derived cannabidiol (CBD) sales. OrganiGram touts Brightfield Group's projection of a $22 billion U.S. hemp CBD market by 2022. That estimate, however, is much higher than others. Hemp Industry Daily forecasts a $7 billion U.S. hemp CBD market by 2023.

OrganiGram's positioning

No matter how you look at it, the growth potential for the global cannabis market appears to be quite promising. But can OrganiGram capitalize on this market growth? There's a good case for the company's prospects.

Capacity will be a must to succeed. OrganiGram currently can produce around 89,000 kilograms of cannabis annually. By the end of this year, the company should boost that level to 113,000 kilograms per year. That's enough to rank OrganiGram in the top 10 Canadian cannabis producers in terms of annual production capacity.

For now, at least, the Canadian adult-use recreational market is the most important focus for OrganiGram. The company is one of only four Canadian cannabis producers with supply agreements in place with all of Canada's provinces. OrganiGram also appears to be well positioned for the cannabis derivatives market that will soon open with its partnerships with vape technology companies Pax Labs and Feather Company and its investment in a fully automated production line for chocolate cannabis edibles. 

Over the long run, international medical cannabis and CBD markets will present even greater opportunities. OrganiGram has key partnerships with German medical cannabis distributor Alpha-Cannabis and Serbia-based hemp CBD company Eviana. The company expects to increase its international operations in the future.

Increasing revenue is important, but so is actually making a profit -- something that few cannabis producers are doing right now. Although OrganiGram reported a modest loss in its latest quarter due to fair-value changes to assets and inventories, the company continues to be profitable on an operating basis. Its low cost of cultivation gives OrganiGram a key competitive advantage over many of its peers.

Several key risks

OrganiGram's heavy focus on the Canadian market could backfire if supply catches up to and surpasses demand in the near future. Some industry observers predict that this will happen as early as next year.

There's also a risk embedded in even the relatively conservative global cannabis market projections. All of those numbers include the U.S., where individual states have legalized medical and/or recreational cannabis but marijuana remains illegal at the federal level.

Like other top Canadian cannabis producers, OrganiGram can't enter the U.S. marijuana market unless federal laws are changed. And it's not looking like that's going to happen soon due to opposition by U.S. Senate Majority Leader Mitch McConnell, who can prevent bills to legalize cannabis from being voted on by the full Senate.

Another risk that we have to consider is the possibility that OrganiGram will mess up badly like some of its peers have. CannTrust, for example, has seen its stock collapse after revelations surfaced that the company cultivated cannabis in unlicensed grow rooms. Canopy Growth appears to have engaged in channel stuffing by shipping more cannabis oil and softgel products than the market could handle, resulting in the company to take a big writedown in its fiscal 2020 first quarter. The good news is that, at least so far, there's no sign that OrganiGram's management has cut corners in any way.

Is OrganiGram a buy?

Investing in marijuana stocks isn't always a black-and-white kind of proposition. There are plenty of shades of gray. OrganiGram might or might not be a buy -- depending on your investing time horizon. 

I think the stock has room to run over the next several months. My hunch is that investor enthusiasm for Canadian pot stocks will pick up as the cannabis derivatives market opens for business. OrganiGram should benefit from this short-term boom.

However, whether or not a Canadian cannabis supply glut hits in 2020, it's on the way sooner or later. OrganiGram's dependence on the Canadian market will hurt it when that happens. If you're looking at a stock to buy that will be a winner over the medium term, OrganiGram probably won't be the best choice.

On the other hand, if you have a long-term perspective -- say, 10 years or more -- I suspect that OrganiGram will be quite successful. I do think that the global cannabis and CBD markets will be very large over time. And I fully expect that the U.S. will eventually legalize marijuana at the federal level. The challenge for long-term investors with cannabis stocks is that there could be a lot of worrisome volatility before the long-term success arrives.