There's a bit of a conundrum occurring among cannabis companies this year. Quarterly revenue for some  U.S. multistate operators (MSOs) is coming in at record levels. On the Canadian front, New Brunswick-headquartered Organigram (OGI 1.99%), one of the leading producers  of indoor-grown cannabis and products made from it, posted double-digit revenue growth in its most recent quarter, alongside significant market share gains this year -- yet its shares have steadily sunk since February. Here's why that market disconnect might give investors a good opportunity to buy in.

Person standing in indoor cannabis facility wearing plaid shirt and baseball hat

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Growing market share should bring a smile to investors faces

According to statistics posted in Organigram's corporate update on Nov. 1, based on data from HyFire, the company has nearly doubled its market share this year as of September, going from 3.9% at the end of 2020 to 7.7%. This number is good enough to place it fourth among Canadian LPs, while competitors Tilray and Aurora Cannabis have been losing market share, going from 20% to 14%, and 8% to 4% respectively. 

As investors await a fiscal fourth-quarter earnings report, expected to take place around Nov. 29, the company is basking in the glory of rising revenue. In its Q3 earnings from July, the company posted $29 million in revenue, up 51% over the previous quarter and 31% over the year-ago period.

Expenses and inventory must be controlled to optimize higher revenue

As revenue grows, the company will need to keep a close eye on cost of sales, expenses, and inventory. Organigram's cost of sales seems to be heading in the right direction, declining from $47 million to $23 million year over year in the third quarter. But its SG&A expenses have risen by 32% year over year for the quarter, partly due to increased staffing and office costs related establishing its Centre of Excellence in collaboration with British American Tobacco, which purchased a 20% stake in Organigram back in March. The CoE, located at Organigram's Moncton location, will develop next-generation derivative cannabis products. Additional expenses were related to an audit opinion for fiscal 2021 financial statements to fulfill regulatory requirements.

But the real thorn in the side of Canadian LPs has been inventory. According to an MJBizDaily analysis released in July, Canadian LPs have failed to sell 80% of its production since the country launched recreational-use marijuana for sale. Based on that number, only 20% of what was produced was actually sold. The rest was likely placed into inventory or destroyed, resulting in writing off of costs related to inventory or destruction of product, and missing out on potential sales.

Organigram CEO Beena Goldenberg attributes the company's growing market share to the high quality of products the company offers, stating, "The strong demand for our products speaks to the fact that consumers are responding favorably to the great brands, products, and innovations that we continue to deliver on a regular basis." This would seem to go hand in hand with better-controlled inventories as well. When producers emphasize market share over quality, rushing products to market, they can leave an abundance of unwanted goods sitting on shelves. As Ian Dawkins, principal consultant of Althing Consulting put it, "Good stuff sells."

Organigram did well to improve cost of sales related to inventory. In the fiscal third quarter, that amount was cut by nearly 50%, from $44 million a year ago to $23 million. Although the bottom line still came to a loss in the July report, it shrank by 96% year over year, from $90 million in last year's quarter to $4 million this time around. . 

The signals are there, but is the market ready to reverse?

Growing revenue, narrower losses, and increased market share will go a long way toward reversing the opinion of investors on a company's stock that has been tanking. Organigram has seen its stock price decline by 65%, from a 52-week high of $6.45 to a recent $2.25. But Organigram is not alone: The broader cannabis market has taken a beating after the first quarter this year. Tilray spiked to a high of $66 in February, but has been quietly resting at the $10 level. And Aurora has fared only slightly better, falling from a high $19 to a recent mid-$6.

For the most part, Organigram got swept up in a broader market sell-off. Analysts believe investors tired of the industry's inability to steadily produce high-quality products. If they're right, Organigram's continued focus on quality could lead it to greater market-share gains.

There have been some recent signs of a reverse in the stock prices over the past week, thanks to two important actions at the federal level in the U.S. First, U.S. Congresswoman Nancy Mace of South Carolina is circulating her state's Reform Act as a basis for legalizing and taxing cannabis at a federal level, a move that Cantor Fitzgerald analyst Pablo Zuanic believes "significantly increases the probability of federal level marijuana reform" within the next few years. And second, the Congressional infrastructure bill passed on to President Biden this past week includes a proposal to allow cannabis scientists to purchase product from local dispensaries rather than relying solely on government production.

For those willing to take a shot with a bit of risk, which would not be considered extreme by many for investing in cannabis, now is a good time to buy low. More risk-averse investors might want to wait to see whether Organigram's late November earnings report displays more of the same positive signals.