The legalization of cannabis in Canada and ten American states has opened up the floodgates to both medicinal and recreational consumption, not only in the Canadian and USA but also in the global market. Many countries now have a model to emulate and Canada offers a well thought out legal and health structure that can be more easily extrapolated to other nations. The lucrative tax revenues that will be generated will entice others to speed up their own review processes for both medical and recreational use. There is no doubt that the recreational market offers a much greater potential for market growth in the long-term and the Canadian experience will provide useful statistics for fast-track, total legalization in other countries.
The stock markets have recognized the potential of this emerging industry and have quickly bid up the stock price to the point where the normal metrics like price to earnings and price to revenues are out of synch with actual performance realities. So, what should investors look for in making informed choices on which companies offer the best value now and in the future? Let’s analyze some of the key parameters that make one Company stand out over the competition
Importance of government partnering
Although cannabis is officially legal in all of the Canadian provinces and ten states, governments have a huge role to play in defining how the products will be distributed, taxed and controlled to prevent abuse. With this in mind, the Company has signed up three provinces and established retail outlets in three more. This will provide near exclusivity in these locations and a convincing argument in the other jurisdictions for priority treatment.
Growing cultivation capacity
The Company currently owns over 2.4 million square feet of cannabis cultivation capacity and is on track to increase this to 5 million sq. ft. by the end of 2019. This translates to approximately 800,000 kg of cannabis production per year. With an average retail price projected to stabilize around $8/kg, the revenue potential is $6.4 billion. This generates solid market growth potential.
Strategic corporate partners
Its partnership with a Fortune 500 company and market leader in the USA of alcoholic beverages with well-established brands provides the Company with unparalleled financial and marketing clout that will withstand any competitive push. It will also furnish the creative resources to expand the cannabis product line into exciting new directions with the Partner’s assistance.
The Company has always recognized the potential international scope of cannabis products and was quick off-the-mark to establish joint ventures in countries like Australia, where it is opening new greenhouses, which will make it the largest cultivator of cannabis in Europe, and Germany, where it has received approval to export dried cannabis for medical usage. In a key marketing strategy move, the Company recognized that oil-based cannabis in soft gel capsules is globally considered more doctor-friendly because dosage and ingredients can be evaluated as an opioid alternative.
Diversifying target markets
The Company has moved into animal health care through biopharmaceutical subsidiaries that concentrate on cannabis formulations and dose delivery systems for both human and animal use. The latter opens up a lucrative pet care market that is less regulated and can offer faster-scaling possibilities. The R&D in these subsidiaries offers an intellectual property firewall that protects the Company against disruptive competition from anywhere in the world.
Another subsidiary has made it the company’s mission to make cannabis fully acceptable to the medical profession by providing accredited medical education programs for physicians. This has the potential of establishing a win-win alliance with a very valuable intermediary.
Understanding the risks
The trouble is that this nascent industry has very few companies that generate profits. This is reminiscent of the large internet behemoths like Amazon and Facebook who showed no profits for a number of years but still commanded huge stock prices. However, in the case of cannabis producers, there is a very valid measurement that can be utilized, which is a ratio of market capacity to production capacity. This is where the Company significantly leads all competitors.
On the risk side, there is some concern that by 2021 there will be an oversupply of cannabis, which could cause a severe decline in prices. However, these projections are based on strictly human medical usage and do not consider the speeding up of recreational legalization in other countries as a reaction to the initial Canadian dominance in foreign markets. The animal health market is another expansionary possibility that the Company has targeted early on that could compensate for any limits to demand for medical use. With average production costs of $1/gm, the Company will be able to compete at a lower price point and maintain market leadership, while weaker companies will be forced to consolidate or go under. This has always been one of the most important signatures of long-term success.