Before you conclude that marijuana stocks are unprofitable investments this year, let me tell you why I think OrganiGram (OGI 3.29%) is a good pick for 2020.
Why does no one want to look at a smaller cannabis company?
Who wants to look at the smaller cannabis companies when everyone is eyeing what the bigger players -- think Aurora Cannabis (ACB +1.80%) and Canopy Growth (CGC 0.87%) -- are up to? For instance, Canopy Growth's partnership with Constellation Brands and its attempt to develop CBD-based beverages has attracted attention. Meanwhile, Aurora Cannabis -- which became investors' favorite in 2019 when it ramped up production -- has plummeted this year with rising debt, dire financial results, and leadership changes.
OrganiGram is certainly a smaller company by market capitalization; as of April 29, its market cap is just $278.3 million, compared with Canopy Growth's $5.9 billion. However, OrganiGram's consistent revenue growth and management's confidence in the eventual profitability of its cannabis 2.0 product portfolio are what give me continued faith in the company. Meanwhile, peers are seeing falling revenue and negative profitability.
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OrganiGram's revenue growth has been consistent
OrganiGram has shown consistent growth in revenue despite industry headwinds. Revenue increased in all four quarters of fiscal 2019. Many cannabis companies justified their lower 2019 revenues by blaming an increase in illegal cannabis sales and a slower-than-expected store rollout in Canada, where strict regulations led to delays in the opening of more legal shops. But OrganiGram seemed unaffected; in the first quarter of fiscal 2020, revenue was up 103.2% year over year, to 25.2 million Canadian dollars. OrganiGram also reported a positive EBITDA of CA$4.8 million.
However, the recent second-quarter results were disastrous.
Second-quarter results tumbled -- why?
OrganiGram reported a year-over-year revenue decline of 13.7% in the second quarter, to CA$23.2 million. A decline in sales volume for recreational flower and oil products was part of the reason; other factors included a decrease in the net selling price of cannabis products due to increasing competition. Also, management suggested that evolving consumer preferences might have taken a toll on the second-quarter sales numbers.
The company also saw a 145% increase in SG&A (selling, general and administrative) expenses and a 45% increase in the cost of sales in the second quarter, both of which help to explain the quarterly EBITDA loss of CA$1.1 million. OrganiGram said the increased spending went to marketing, promotion, and scaling its operations for the launch of cannabis 2.0 products.
Amid the dismal results, there was good news: Recreational cannabis showed a 16% increase from the first quarter to the second, demonstrating the increased demand for cannabis 2.0 recreational products. The company launched a few of its 2.0 products, including chocolates and vape pens, in December.
OrganiGram's cannabis 2.0 product portfolio
OrganiGram's cannabis 2.0 products are already a hit, making up 13% of net revenue in the second quarter. In December 2019, the company shipped its first batch of 2.0 offerings -- namely, the Trailblazer Spark, Flicker, and Glow 510-thread vape cartridges. On Feb. 20, it launched its Edison + Feather ready-to-go distillate pens. Additionally, the market could see the launch of Edison + PAX ERA distillate cartridges, OrganiGram's premium line of vape products, in the second quarter of calendar year 2020. And for consumers with a sweet tooth, OrganiGram also launched its line of premium cannabis-infused chocolates, Edison Bytes, in February.
What's driving OrganiGram's revenue is its focus on continuing to provide excellent products through innovation and testing. It conducts regular consumer research to understand people's preferences and offers a diversified portfolio of products.
OrganiGram's diverse product portfolio was on display in the second quarter:
- Cannabis 1.0 products made up 52% of net revenue
- Cannabis 2.0 products made up 13% of net revenue
- Wholesale cannabis sales made up 24% of net revenue
- Canadian medical sales made up 10% of net revenue
- International cannabis sales made up 1% of net revenue
Recently, management announced a new line of recreational products -- including organic cannabis line ANKR Organics -- which it expects to launch in fiscal Q3 2020.
Capacity to survive the COVID-19 storm
In April 2020, OrganiGram made some temporary layoffs; 45% of its workforce departed, mostly voluntarily. Layoffs are never a good sign, but these were made to boost social-distancing efforts during COVID-19. The company faces a one-time charge of approximately CA$600,000 for the lump-sum payments made to the laid-off employees.
You would think that a 45% reduction in its workforce would affect a company's production capacity, especially now that demand is high amid the pandemic. But OrganiGram is well prepared with its inventories on hand -- it even has contingency staff to fulfill packaging capacity to meet the current appetite for cannabis.
I am impressed with management's strategy of focusing on more automated products now, delaying the production of those requiring manual labor to a later stage after the pandemic ends. For instance, OrganiGram says its Edison Bytes chocolate truffle can be produced with its automated production and packaging equipment. The company is also ensuring its production of medical cannabis continues in full swing to serve the patients who rely on its products.
Furthermore, OrganiGram ended the quarter with cash and short-term investments worth CA$41.2 million, up from the first quarter's $34.1 million -- showing it's capable of surviving any COVID-19 impact that could arise. I'm impressed with management's confidence in its current capital sources and its ability to manage its cash flows to meet the current demand. Compare this performance to that of peer Aurora Cannabis (ACB +1.80%), where the debt burden is rising and profits are elusive.
Long-term game
Currently, the broader market is weighing on the marijuana industry. However, the COVID-19 outbreak has somewhat been favorable for the industry as it sees rising cannabis demand and sales.
A growing, highly regulated industry such as cannabis requires time to show its full potential. And cannabis is yet to be fully legal in the U.S.; federal legalization will be highly beneficial if and when it occurs, allowing cannabis companies to expand.
This is an evolving industry with plenty of turmoil to go around. If you're an investor interested in marijuana who's seeking a stable, cash-rich investment in a bumpy space, OrganiGram looks like a good bet to help your money grow over the long term.
