Please ensure Javascript is enabled for purposes of website accessibility

Is OrganiGram a Buy After Almost Breaking Even in Q1?

By David Jagielski - Jan 27, 2020 at 11:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock is off to a hot start in 2020, but can it continue rising?

Shares of OrganiGram Holdings (OGI -4.13%) have been surging since the company released its first-quarter results earlier this month. News of the company beating the top end of analyst projections propelled the stock up by 50% the day the results were released. And while the stock has come down a bit since then, OrganiGram is already up over 25% in 2020, well above the Horizons Marijuana Life Sciences ETF, which has risen a more modest 11%.

Now that the dust has settled, let's take a closer look at OrganiGram's impressive results to see whether or not the stock is a buy today.

OrganiGram falls just short of breakeven to start the year

In Q1, the company's net revenue of 25.2 million Canadian dollars came in at more than double the CA$12.4 million OrganiGram recorded in the prior-year quarter. What was perhaps just as impressive was that the company also came very close to breaking even this past quarter, recording a loss of just CA$863,000. 

The company was able to squeeze out an operating profit of CA$154,000 even though its operating expenses doubled from $5.5 million a year ago to over $11 million in Q1. What's key is that there wasn't a whole lot of noise on the company's results. A year ago, the company reported an impressive but misleading net income of CA$29.5 million. It wouldn't have been attainable if not for a CA$42.9 million fair value change in biological assets that sent the company's gross margin to a whopping CA$51.7 million, despite OrganiGram reporting net revenue of just CA$12.4 million.

Cannabis edible products.

Image source: Getty Images.

This time around, in Q1, OrganiGram received a minor boost of CA$1.9 million from fair value changes to its assets. There wasn't as much distortion in the company's results and that makes it an impressive result given that it incurred losses of CA$22.5 million and CA$10.2 million in the fourth and third quarters, respectively. However, that doesn't mean that the company's results are going to remain stable or predictable.

CEO cautions against reading too much into the results

OrganiGram CEO Greg Engel tried to cool some of the overreaction and excitement from investors on the company's strong Q1 results, noting that there is still uncertainty in the market. He stated, "I still think we're not going to hit any sense of normalcy or predictability until the fourth quarter of this year," pointing to the launch of the edible and vaping segment of the market, which was just made legal in October and where the new wave of products only started hitting store shelves in December.

For OrganiGram, it's the chocolate edible products that will be key in the company's success in 2020. Last year, the company announced a CA$15 million investment into a chocolate cannabis product line where OrganiGram will be able to produce up to four million kilograms of chocolate edible products annually. The success of those products will dictate whether OrganiGram has a good year in 2020.

But whether it's fair value gains and losses, edible sales, or the impact vaping-related illnesses may have on the industry, there are many factors that can affect OrganiGram's future results and that's why it's important for Engel to offer a disclaimer alongside this impressive performance.

What does this mean for investors?

The past six months have been challenging for cannabis investors. The Marijuana Life Sciences ETF has fallen more than 40% as the industry as a whole has taken a beating as a result of underperforming earnings results and bad press stemming from exaggerated health claims. While the temptation is to believe that OrganiGram is different and that these recent results are proof that it's a more stable investment, the reality is that isn't the case, at least not yet.

The volatility in OrganiGram's stock should serve as a warning as to how much the share price can move. And while this time the stock got a big boost from a good earnings result, the opposite can also happen if the company finds itself on the opposite end of expectations next quarter.

That's why the safe approach for investors would be to wait at least another quarter, perhaps two, to see if the company can continue on this trend and that these results weren't just a fluke. Otherwise, there's the danger that a big correction could take place, especially given how sharply the marijuana stock has risen in January.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

OrganiGram Holdings Stock Quote
OrganiGram Holdings
OGI
$1.16 (-4.13%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.