It's been a rough 12 months for Canada's licensed cannabis producers, but at least investors can still look forward to next year. Consensus estimates for Canadian licensed marijuana sales are expected to reach CA$6.5 billion in 2020 and climb to CA$7.5 billion in 2021.
A recent note to investors from John Zapparo at the Canadian Imperial Bank of Commerce (NYSE:CM) suggests consensus estimates are way too aggressive. If CIBC's bold estimate comes true, there will be a lot of disappointed investors next year.
|Company (Symbol)||2020 Consensus Revenue Estimate||2021 Consensus Revenue Estimate|
|Aurora Cannabis (NYSE:ACB)||CA$591 million||CA$992 million|
|Canopy Growth (NYSE:CGC)||CA$625 million||CA$1.18 billion|
|Aphria (NYSE:APHA)||CA$682 million||CA$956 million|
|Organigram Holdings (NASDAQ: OGI)||CA$73 million||CA$156 million|
|Sundial Growers (NASDAQ: SNDL)||CA$490 million||N/A|
|Hexo (NYSE:HEXO)||CA$331 million||N/A|
Zapparo's expecting just $2.2 billion in 2020, then $3.3 billion in 2021. That isn't enough for all six of these companies to meet expectations, and there are over a hundred other licensed producers (LPs) in Canada. If we include Tilray (NASDAQ:TLRY), which reports in U.S. dollars, and fiscal 2021 estimates that aren't available yet for Sundial and Hexo, CIBC's predictions for licensed Canadian cannabis sales in 2021 are more troubling still.
What are the odds that CIBC's grim predictions will come true? Have a look at some important numbers to find out.
No help from the 99%
From May through June, Statistics Canada found that 99% of Canadians who reported never using cannabis before had no intention to try it over the following three months. That's because adults who have avoided cannabis their entire life rarely acquire a taste for THC no matter how frequently they're exposed to marijuana's main psychoactive component.
Statistics Canada estimated the number of cannabis consumers at 4.9 million, or around 16% of the population. That was the same amount as the previous-year period, which wrapped up before the beginning of adult-use marijuana sales.
Gaining market share
Canada effectively decriminalized cannabis possession a long time ago, and the internet is rife with mail-order marijuana services that sell higher-quality products at significantly lower prices. More retail locations and an improved supply chain have been helping licensed cannabis gain market share, but the illicit market isn't giving in easily.
Sales by volume have improved a great deal since adult-use sales began last October, but they probably won't climb fast enough to meet lofty consensus estimates. During the three months ended December, Health Canada reported sales of an annualized 84,924 kilograms of dry flower. During the three months ended June, sales volume increased 34% to an annualized 113,496 kilograms of dry flower. Over the same two periods, concentrated cannabis oil sales rose by an impressive 29% to 110,528 liters.
Gaining fast enough to meet expectations?
The overall growth rate for licensed cannabis in Canada isn't as fast as investors were expecting, but it's still awfully fast. If sales volume continues rising at its present pace, and prices hold steady, total LP sales could climb to CA$6.5 billion in 2020.
This week, the average selling price of cannabis reported by LPs came in at CA$6.17 per gram of dry cannabis flower. If licensed cannabis sales are going to reach the consensus estimate of CA$6.5 billion in 2020, they'll have to sell around 1.05 million kilogram equivalents at recent prices. That's around 58% more than the current annualized run rate.
Unfortunately for the industry, per-gram prices aren't likely to stay aloft because the big producers have already started churning far more licensed cannabis than Canada's limited market can handle. In 2020, Canopy Growth, and Aurora will probably be able to produce more than 1 million kilograms of cannabis per year.
Signs that LPs are already producing far more cannabis than Canada's market can handle have popped up in recent months. Total dried cannabis inventory at the end of June was 22.5% higher than at the end of May. With an astounding 312,251 kg of dry flower and 141,181 liters of concentrated oil in the supply chain, investors better brace themselves for some inventory writedowns as cannabis products reach the end of their limited shelf lives.
If shares of these companies are going to stop sliding and produce any gains in 2020 and beyond, they'll need to produce a lot more international sales growth than we've seen recently. For example, Hexo's still expanding, its European toehold in Greece and hasn't reported significant international sales yet. Sundial Growers and Organigram also generate all their revenue in Canada at the moment.
Aphria's invested heavily into international operations, but during the year ended May 31, 2019, the company recorded just $299,000 in sales to Europe and nothing from subsidiaries in Latin America, or Africa. As for south of the border, there's very little chance they'll be exporting to the U.S. in the foreseeable future.
Canopy Growth is one of the stronger international players with around 10% of topline revenue coming from outside Canada in the second quarter. At an annualized CA$42 million, though, the company's international segment needs to shine a lot brighter.
While Zapparo's estimates seem a little severe, they'll probably land a lot closer to the mark than the consensus view. If you're going to invest in marijuana stocks, you might want to steer clear of the big Canadian LPs for now.