Looking Beyond The Messy Post-Legalization Cannabis Revenue Picture

Benjamin A. Smith

When GMP Securities came out and lowered Canopy Growth’s FY 2019 revenue forecast (ending March 31st, 2019), they may have well done it for the entire sector. While some company-specific issues were cited, it’s quite obvious that the overarching sector issue—retail cannabis supply—is not endemic to Canopy alone.

The Alberta liquor, Gaming and Cannabis commission (AGLC) said as much last week by disclosing that it had not received as much quantity or variety from licensed producers as it anticipated. Same goes for the Ontario Cannabis Store (OCS) and the Société Québécoise du Cannabis (SQDC), which recently had to pare store hours due to supply constraints.

The end result of this post-legalization morass: cannabis stocks have been taking it on the chin. With the ‘worst case’ supply crunch scenario coming to pass, a swift downward re-valuation of cannabis stocks was the unavoidable result. Many issues are down 30-50% since October 16th, as aggressively forward-looking valuations get pushed back another couple of quarters—at least.

While the supply-induced revenue hit isn’t doing LP top lines any favors, investors can take comfort that none of this is related to end demand. In fact, anecdotes countrywide continue to extol the fact that consumer demand has far exceeded expectations. Here is a sampling of public commission statements to date:

“This volume of orders far exceeds the forecasts of the SQDC,” according to the Quebec government pot retailer.

“I would say the initial demand has been outstanding,” Niaz Nejad, a vice-president with the AGLC, told the Calgary Eyeopener on October 30, 2018.

Ontario Cannabis Store website is warning consumers that delivery times for their orders may be longer than expected due to “unbelievably high demand” and labour action at Canada Post.

The only outlet on Cape Breton Island had to close completely this week because they simply didn’t have enough stock. Two weeks into legalization and demand for cannabis is still outstripping (supply).

With Canadian adult-use demand every bit meeting or exceeding what we thought it would be, the revenue-induced sector re-valuation may be just a temporary speed bump. After all, supply chain logistics are a problem that extra capacity and operational streamlining with solve relatively quickly; there is no fundamental fix for consumer demand.

Savvy investors realizing the distinction are likely already maneuvering portfolios in a sector who’s demand-side fundamentals haven’t change one iota. With the fast money (a.k.a. sell now, ask questions later crowd) largely vanquished from the cannabis trade, a more realistic assessment can take place. In our view, that entails the realization that select cannabis stocks are still attractive investments, and that recent re-pricing has largely corrected the messy retail execution that has unfortunately transpired.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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