There's a bit of a conundrum occurring among cannabis companies this year. Quarterly revenue for large multi-state operators (MSOs), such as Curaleaf, is coming in at record levels. Meanwhile, stock prices are heading in the opposite direction. Curaleaf saw it's 52-week high of $18 decimated over the past nine months, to half that price.
On the Canadian front, New Brunswick headquartered Organigram (OGI 0.98%), is going through a similar experience. As one of the leading producers (LP) of indoor-grown cannabis, and cannabis products for medical- and recreational-use, the company had a strong second quarter, only to be shrugged off by investors resulting in a 50% decline in stock price. But where revenue climbs, losses narrow, and a stock price drops, could these all combine to equal a buy signal for investors?
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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 as stated in its fiscal 2021 third quarter report provided in July. Investors were treated at that time with results displaying increased gross revenue at the rate of 51% sequentially over the previous quarter, and 31% over the same period a year ago, resulting in total revenue of $29 million.
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. On the sales cost front, the numbers seem to be going in the right direction as they have declined from $47 million to $23 million for the same quarter on a year over year comparison, while SG&A expenses have risen by 32% year over year for the quarter.
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, thereby rushing products to market, it can result in an abundance of goods that end up sitting on shelves if the consumers don't want it. As Ian Dawkins, principal consultant of Althing Consulting put it, “Good stuff sells.”
For Organigram, fiscal third quarter 2020 inventory contributed to $44 million in total cost of sales, compared to only $23 million for the same quarter this year. Although the bottom line still came to a loss in the July report, it was far narrower than the previous year's quarter by 96%, improving from a loss of $90 million last year to a loss of $4 million this year.
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 $2.28. But Organigram is not alone in that 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.
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. 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. This lead Cantor Fitzgerald analyst, Pablo Zuanic to comment that the move "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. For the more risk averse, it might be wise to wait for a late November earnings report from Organigram to see if it displays the same signals provided in the previous quarter.
