The cannabis industry in Canada hasn't been in good shape for some time. Growth is almost nonexistent, profits are elusive, and stock prices of marijuana producers have been nosediving. What's particularly telling are the moves of two of the industry's leaders, Aurora Cannabis (ACB -6.81%) and Canopy Growth (CGC -3.01%).
Both of these companies are trying to improve their financials, and there's one common trend among them that investors should be watching closely this year: their focus on markets outside of Canada.
The Canadian pot market has become too competitive
Canopy Growth has been arguably too focused on expanding to the U.S., to the point where it may even cost the company its listing on the Nasdaq. Aurora, meanwhile, has been focusing on international markets and medical marijuana in an effort to improve its margins.
The following charts help illustrate just why the Canadian pot market has become so unattractive. What started out as a red-hot pot market in late 2018 after Canada legalized recreational marijuana has seen its growth rate significantly slow down.
Data source: Statistics Canada. Chart by author.
To make matters worse, there has also been a rise in the number of marijuana producers in Canada. And at 17%, the increase in marijuana producers last year was nearly the same as the 18% increase in revenue.
Data source: Government of Canada. Chart by author.
In the industry's early growth stages, there were large increases in revenue relative to the number of cannabis producers entering the industry. So marijuana companies were experiencing significant growth as there was plenty of market share to go around.
Nowadays, however, there's more saturation, and the level of competitiveness results in price compression. And don't forget -- this doesn't include the number of unlicensed producers in the black market that Canopy Growth and Aurora also have to compete with.
Will more marijuana companies shut down their Canadian operations?
In January, Canopy Growth announced it completed its divestiture of retail cannabis operations in Canada. It has also been shutting down facilities, as has Aurora.
Becoming less dependent on the Canadian market could be the ultimate end goal for these once-dominant cannabis companies, who clearly see the writing on the wall in the Canadian cannabis industry.
That's why one thing I would be watching for in the industry is to see if Aurora, Canopy Growth, and other cannabis companies make more moves to minimize their presence in Canada, specifically with respect to the recreational market. Three years ago, medical marijuana sales (including the international markets) accounted for less than half of Aurora's revenue. Today, that segment makes up nearly two-thirds of the company's top line.
I would avoid cannabis stocks with a large Canadian presence
The Canadian marijuana market is simply too competitive for it to be a good option for a company targeting growth opportunities. The more attractive opportunities are in the U.S. cannabis market and to a lesser extent, Europe. And that's why I can understand Canopy Growth's position to focus on the U.S. market.
Even if it were to become delisted from the Nasdaq and became a multi-state operator, its financials would instantly improve. Although it may not benefit from the liquidity of a major exchange like the Nasdaq, the pot stock would be a much better buy in the long run.
Investors have lost big, investing in the Canadian cannabis industry, and there's little reason to expect that will change anytime soon. Cannabis investors are better off looking at businesses with as little exposure to the Canadian pot market as possible.
