Please ensure Javascript is enabled for purposes of website accessibility

OrganiGram Had a Brutal Q2: Is the Worst Still to Come for the Stock?

By David Jagielski - Apr 19, 2020 at 6:07AM

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 company's sales are already struggling, and there are tougher economic times ahead.

OrganiGram Holdings (OGI -1.26%) released its second-quarter results on April 14, and they were underwhelming. Several issues should give investors pause before buying the stock, and the biggest concern is that things may not get much better this year.

The stock's already down 38% since the start of the year, which is slightly worse than the Horizons Marijuana Life Sciences ETF (HMLSF -0.17%) that's down 36%. However, that gap could get even bigger this year, as OrganiGram's stock could be due for more losses in its future, and here's why.

Its revenue doesn't look good at all

During Q2, OrganiGram reported net revenue of 23.2 million Canadian dollars. That's down from the prior-year quarter when it reported gross sales of CA$26.9 million. What's most concerning is that the drop was due to declining sales in the recreational market, where OrganiGram's revenue was just CA$18.9 million. That's down 39% from a year ago when it generated CA$30.7 million in recreational sales. Even if we look at the past six months, revenue is only up by 23% from the prior year. And here again, the adult-use market saw a year-over-year decline of 17%.

To make matters even worse, a large chunk of the company's revenue comes from three customers. In its earnings report, the company noted that three customers "individually represented more than 10% of the company's net revenue." Given the dangers in the industry and many companies potentially on the brink of running out of cash, it makes OrganiGram's sales numbers even more vulnerable if its customers are among those that are tight on cash.

Someone trimming cannabis plants

Image source: Getty Images.

Its own cash situation is not improving, either

As of Feb. 29, OrganiGram reported CA$41.1 million in cash -- down from CA$47.6 million as of Aug. 31. In six months, the company's burned through CA$25 million on its operating activities and another CA$65 million on property, plant, and equipment purchases. To keep its cash balance up, OrganiGram's been taking on debt and issuing more shares.

The company has been trying to cut costs. A week before OrganiGram released its results, it announced it was laying off approximately 400 employees, or 45% of its workforce. The pot producer's CEO Greg Engel stated: "Our priority right now is to make sound strategic decisions that are in the best interests of our people and which will contribute to the long-term sustainability of the company."

Layoffs have been common in the industry this year, and there could be more to come as the Canadian economy continues to struggle amid the coronavirus pandemic. One estimate, according to the Candian Centre for Policy Alternatives, has the unemployment rate in Canada hitting 13.9%, which would be the country's highest in 70 years.

The challenging economic conditions ahead could lead to declines in demand, and that could put even more pressure on OrganiGram to reduce costs to counteract even more of a drop in revenue. Things could quickly go from bad to worse this year for OrganiGram, as its weak financials make it especially vulnerable.

OrganiGram could be the next pot stock to fall to $1

It was May 21, 2019 when OrganiGram first began trading on the Nasdaq. Since then the stock has lost more than 80% of its value -- by comparison, the Marijuana Life Sciences ETF has fallen by 71%. And although the stock hasn't done significantly worse than its peers, that's not a good benchmark to aim for these days. Many pot stocks are struggling and may not come out of 2020 intact, especially if the pandemic weighs on cannabis sales this year.

With its sales already underwhelming investors and the company struggling with cash burn, OrganiGram is becoming a very risky investment to hold. And that's why it wouldn't be surprising for the stock to continue to fall this year and eventually hit the $1 mark. Cannabis investors should steer clear of OrganiGram and are better off looking at pot stocks with more cash on their books, or that are at least generating positive cash flow.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends OrganiGram Holdings. The Motley Fool has a disclosure policy.

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
$1.18 (-1.26%) $0.01
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$5.94 (-0.17%) $0.01

*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 analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

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.