Over the past year, shares of Canadian marijuana grower OrganiGram (OGI +0.00%) have rallied close to 60% despite what's been a pretty lackluster business performance. To add fuel to the fire, British American Tobacco (BTI +0.94%) announced this March that it would make a strategic investment in the company. The tobacco giant will infuse CA$221 million in cash into OrganiGram in return for just under a 20% equity stake.
As exciting as that may sound, an investment in a firm that is rapidly losing money isn't likely to turn around its operations. Many of OrganiGram's woes still remain unresolved, and I think it's only a matter of time before new and old investors come to their senses. In fact, its shares are already down about 16% from the time when its collaboration with British American Tobacco went public. This is definitely a stock to pass on due to its mounting losses, especially before its earnings release in the coming weeks.
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What's going on with OrganiGram?
During Q1 2021 (ended Nov. 31), OrganiGram's net revenue declined by 24.3% year over year to just CA$19.3 million. The decrease was largely due to lower wholesale volume and lower pricing. There isn't anything particularly impressive about the company's offerings -- it sells the standard array of dried flowers, pre-rolls, and vape cartridges. While the cannabis-infused beverage industry was taking off in Canada, the company had to go back to basics and focus on resolving supply chain and order fulfillment issues.
What's more, OrganiGram's cost of goods sold amounted to more than its net revenue, a total of CA$23.2 million. This was due to higher production costs and inventory issues. Over 100 licensed producers are competing for the CA$3.2 billion legal marijuana market opportunity in Canada -- at the moment, less than a third of consumers get their pot from the legal market. All combined, this spells significant pricing headwinds for everyone except the largest sector players.
To make matters worse, OrganiGram took a CA$12.8 million inventory and biological asset write-off, as it could not sell all of the pot it produced. This means that its total gross profits in Q1 2021 amounted to a stunning negative CA$37 million. Back in 2019, the company invested in cannabis cultivation facilities that could grow up to 76,000 kg of cannabis per year. However, it only manages to sell an annualized rate of 19,280 kg each year. Reducing its growing capacity to 40% and laying off 25% of its workforce last July clearly wasn't enough. It still carried a massive loss before tax of CA$34 million per quarter.
Is there any hope left?
Even though the company managed to make a marginal profit in terms of operating cash flow, its declining revenue is still a huge problem. Right now, OrganiGram already sells its pot in all of Canada's provinces, and has launched 67 new products. So it is unlikely that expanding to other geographical areas or offering a wider product selection will save OrganiGram's bottom line.
Over the past year, the company resorted to selling stock to keep its business afloat, with its outstanding share count increasing 50% to 293.15 million. And even with such abysmal performance, the company's stock is still trading at an inexplicable 10.6 times revenue. For comparison, medical marijuana grower Trulieve Cannabis (TCNNF +2.91%) also generates nine figures in revenue, but is profitable, and doubled its sales year over year in 2020. Its stock also has a valuation of 9.8 times sales.
It is bewildering that investors could pay such a high price for something with very little (or even negative) intrinsic value. I'd highly recommend checking out alternative marijuana stocks that offer extraordinary growth for a fraction of OrganiGram's price. Investors should steer clear of its stock, especially before its April earnings release.
