Cannabis legalization is generally good news for the industry and companies looking to expand into other parts of the world. However, that's not necessarily always the case, as it also creates opportunities for those countries to start becoming exporters of cannabis themselves, and they could end up competing head-to-head with large North American producers. Canada-based Aurora Cannabis (ACB +1.39%) prides itself on its global presence, and according to its website, it has a footprint in 25 countries and has 15 global production facilities.
While that's great for growth opportunities, especially when the U.S. market is still off-limits for the foreseeable future, the company's presence in more markets also means it will face more competition. Not only will it be competing with other cannabis stocks, but also many of its peers that are vying for positions in those markets.
A good example is hemp, which is legal in the U.S. thanks to the farm bill passed last year. And while Aurora and other Canadian companies see this as an opportunity to expand into the U.S. market, the problem is that they will not only be competing with other Canadian producers but with U.S. hemp producers as well.
Zimbabwe targets hemp as its next big export
In Zimbabwe, there is a pilot project underway that will see industrial hemp being grown on prison grounds in Harare. One of the motivations for the government to permit hemp cultivation is that it could be a substitute for tobacco, which according to 2017 data, made up more than half of the country's total exports.
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With hemp growing in popularity for cannabidiol-based products, it could present a significant opportunity for the country to diversify its exports and be less dependant on tobacco. And that could lead to its products making their way to North America and other parts of the world as well.
Last year, Zimbabwe became the second African country after Lesotho to legalize marijuana for both scientific and medical use.
Thailand is another country that's looking to expand its cannabis program
Asia is another part of the world where cannabis legislation just hasn't made much progress. But one country, Thailand, has been receptive to medical marijuana. It's not only building Southeast Asia's largest medical marijuana facility, but it's also expected that legalization will be expanded to allow individuals to grow as many as six cannabis plants for medical purposes. And while that's good news for the industry, the government is looking to be the main producer of medical marijuana, with the Government Pharmaceutical Organization projecting that by February, it will have 1 million bottles of cannabis oil, containing 5 milliliters each, available.
And while it may present an attractive opportunity for North American producers, Thailand looks to be wary of allowing foreign competitors to come in and take over the industry. And that could help local companies succeed and build up their presence on the global stage.
Why North American cannabis companies could be in trouble
A year ago, the opportunities presented by the legalization of cannabis in many parts of the world would have excited investors. Expansion and growth were all the talk in the industry. But with a company like Aurora Cannabis coming under fire for its poor financials and the amount of cash it's been burning through, it may no longer be an easy decision to simply expand in a part of the world because cannabis has been legalized there. There's going to have to be a good business case for it.
Investors need to look no further than Aphria (APHA +0.00%) as to how quickly an international strategy can go sideways. Last year, the company's stock took a big hit following allegations that it vastly overpaid for assets in Latin America and the Caribbean. Investors are paying much closer attention to the actions companies are taking to make themselves more or less profitable. And expanding for the sake of expansion isn't going to win over shareholders, not when it's going to saddle the company with more expenses along the way.
Key takeaways for investors
With the markets being more sensitive to a company's financial statements, it's likely that cannabis producers are going to have to put the brakes on international expansion. And that means international growers will have an opportunity to build up their own positions in the industry and could end up competing with North American companies in Europe, Canada, and other markets where hemp or medical marijuana has been legalized.
For companies like Aurora and Aphria that are banking on international growth, it could impact their market share and overall valuations. With more of a focus on profitability, they won't be able to be aggressive in pursuing new market opportunities. And while they may become stronger companies by improving their bottom lines, their positions internationally will likely get weaker. The good news, however, is that the international markets are still a long way from being as developed as those in North America, and that gives Aphria and Aurora a lot of time to strengthen their financials in preparation for what could prove to be a big battle on the global stage.
