Why the Next Quarter Could Be Tough for Canadian Cannabis Companies

For many Canadian pot stocks, growing sales just isn’t a given anymore. Now that the industry is more developed and there are more competitors, companies are getting more aggressive in trying to pad their top lines, like introducing value brands to wrestle away sales from the illegal market and rivals. But that only exacerbates another issue in the industry: A lack of profitability. Many pot producers in Canada are deep in the red. 

It’s a challenging time to be investing and holding shares of Canadian cannabis companies. Unlike their U.S. counterparts, their market isn’t as large and it’s already completely legal, so brand new areas of the country aren’t suddenly opening up for business. And with lockdowns still affecting the market, there could be some more near-term pain for cannabis investors who decide to hang on to Canadian pot stocks.

People checking on plants in a greenhouse.

Image source: Getty Images.

Why the next quarter could be a tough one

Stay-at-home orders amid the pandemic aren’t a new challenge for the industry to deal with. But what might make things worse for pot producers is that during May, the Ontario Cannabis Store (OCS) said that it would accept fewer deliveries in its effort to keep COVID-19 case numbers down. Although it stated that it would still receive orders, the volume it processes will be lower.

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All the legal pot shops in Ontario go through the OCS, so if its volumes are down, there will be fewer products for stores to receive. And compounding the problem is that stores also aren’t ordering as much with consumers not able to shop in-store. The good news is that Ontario stay-at-home orders are over as of June 2, and the province is beginning its reopening plan. Unfortunately, the damage may be done for the upcoming quarter, which will include the month of May. 

For Canadian pot producers, Ontario is simply too large a market to ignore. In March 2021 (the most recent month for which data is available), retail sales totaled 298 million Canadian dollars for all of Canada. Of that tally, Ontario accounted for more than one-third with CA$103 million. And that’s a larger percentage than a year ago now that it has opened more stores:

  March 2021 March 2020
Province Sales % of Canada Sales % of Canada
Ontario  $103 million 35%  $47 million 26%
Alberta  $59 million 20%  $40 million 22%
Quebec  $48 million 16%  $38 million 21%
British Columbia  $41 million 14%  $24 million 13%

Data source: Statistics Canada. All figures in Canadian dollars.

The top four provinces in the country accounted for 85% of revenue in March 2021 versus 82% a year ago. But the big difference: Ontario is capturing more of the pie and is a more crucial piece of the industry’s growth in Canada. So even a low month for the OCS could have crippling effects on the industry and any pot producer that sells its products in the province. 

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Should you sell Canadian pot stocks?

Canopy Growth (NASDAQ:CGC) released its latest earnings report on June 1. Its sales of CA$148 million for the period ending March 31 were up 38% year over year but down 2.7% from the CA$153 million that it reported in the previous period. And this was despite cannabis sales in Canada totaling CA$840 million during the first three months of the year, which was 1.8% higher than the CA$825 million that was reported in the final three months of 2020.

If the company can’t find a way to grow its sales during an improved quarter, there won’t be much hope that during the next quarter, amid a problematic May, things will be any better. While Canopy Growth is in the midst of a transition and trying to get closer to profitability (it reported an adjusted EBITDA loss of CA$94 million last quarter), generating consistent revenue growth has long been a problem for the company that goes beyond just one quarter. And other companies face similar issues, as rival Aurora Cannabis remains unprofitable and its revenue during the same period totaled CA$55 million, which was down 18% from the previous quarter.

For cannabis investors, the safer play is definitely investing in U.S.-based pot stocks. Although they operate in quasi-legal environments where their operations are legal within individual states but not federally, they’re not in any danger of shutting down. Plus, growth opportunities are plentiful, especially with recreational markets in New Jersey and New York opening up soon.

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Not only are they better plays for the short term, but there’s also a lot more potential over the long haul. By 2025, the U.S. market could be worth as much as $34.5 billion, according to estimates from BDSA. The Canadian market will be nearly one-sixth the size at just $6.1 billion. If you’re a growth investor, the U.S. pot market presents a much more attractive investment opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/06/03/why-the-next-quarter-could-be-tough-for-canadian-c/

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