Cover growth (NYSE: CGC) the recently released results for the last three months of 2018, and the launch of the Canadian Adult Use Program, have allowed the company to sell 334% more marijuana than it did a year ago . Unfortunately, operating expenses have risen much faster than sales, and profit margins in the adult market are slower than expected.
Thanks to a $ 5 billion injection of Constellation Brands earlier this year, the company can bear the losses, but investors want to know if they will continue. Here are some reasons to expect at least several other quarters of Canopy Growth's operating losses.
1. Mail marijuana continues to be strong
The launch of marijuana for recreational purposes in Canada has been a trivial event for most users of the country because the purchase of illegal marijuana has been deemed almost legal for a long time. There are dozens of online mail-order marijuana shops that pass by Canada Post, discreetly, and most even accept Pay Pal. Although the police can get warrants to inspect parcels once they have been delivered, it's rarely worth it. Criminal charges for clients are virtually unknown.
Edibles and concentrates are the two fastest growing product categories in the US, but you can not buy from licensed retailers in Canada either. Of course, there are many MOMs that address the connoisseurs of both.
Mobile media is not the only competition faced by licensed producers and retailers such as Canopy Growth. There are still many illegal marijuana clinics all over the country, and they do not seem to be going anywhere. In New Brunswick, potential customers of Canopy Growth are waltzing in front of government-run stores that sell their products and at marijuana clinics that do not sell them.
Although authorities report from time to time that clinics are closing down, local municipalities that do not want to be seen as limiting treatment options for patients rarely take action. When the authorities insist on this issue, the authorities generally claim that the application of marijuana laws is simply not an effective use of scarce resources. Whatever the case may be, Canopy will probably have to compete with a flourishing illicit market in the long run.
2. Authorized Producers Can not compete with MoM
Statistics Canada conducts anonymous online surveys that ask people for the size and price of their latest marijuana purchases, whether they are illegal or allowed. The average price reported for non-medical marijuana fell to only 7.43 Canadian dollars ($ 5.61) per gram in 2017, before companies like Canopy Growth start producing enough cannabis each month to cover the growing bay. # 39; Hudson.
In the three months ended December, Canopy Growth recorded an average selling price per gram of CA $ 6.96 ($ 5.25) in leisure sales. This is not necessarily bad, but the company has also expensed the production costs of CA $ 6.41 ($ 4.84) per gram sold.
Canopy Growth also reported an expenditure per gram of C $ 1.45 ($ 1.09) related to the new Canadian excise tax on cannabis. This represents a significant advantage for visible minorities and illicit clinics who do not pay federal excise tax or provincial sales taxes.
The price difference for patients for medical use who want an edible solution is huge. One Bottle of 60 Capsules Tweed, the flagship brand of Canopy Growth, costs CA $ 226.80 ($ 171.23) at the Ontario Cannabis Store. The bottle contains only 600 mg of active ingredient marijuana, the amount of THC that patients can buy in the form of candy or candy at prices ranging from $ 40 ($ 30.20) to 60 $ CA ($ 45.30 CDN) to doctors and clinics.
3. There is no legal shortage of weeds in Canada
Across the country, licensed retailers are struggling to keep their inventory full, but that's not because licensed producers can not keep up. According to Health Canada, retailers sold only 14,379 kg of legal cannabis in December. In the same month, product ready for sale in the supply chain Pink to 57,914 kg.
Aurora Cannabis (NYSE: ACB) This is another giant Canadian producer who recently lost a lot of money, and his call for results has highlighted a possible cause of the perceived adult scarcity of marijuana. Aurora, Canopy Growth and their peers are allowed to export marijuana for medical purposes to countries that pay more per gram. As a result, Aurora does not provide provinces with more cannabis consumed by adults than what their long-term supply contracts require.
At the end of December, Canopy Growth inventories stood at $ 185 million ($ 140 million), up 23 percent from three months earlier. Keeping sufficient stocks is important, but this significant inventory growth during a perceived shortage is not a good sign.
On the plane B?
The Canadian Adult Use Program will not be the revenue contributor that investors have been hoping for, and this will cause Canopy Growth to record more operating losses over the next few quarters.
Canopy sold marijuana for medical purposes in the EU at a price of CA $ 13.28 ($ 10.03) per gram, suggesting that the region could become a high-margin revenue stream. Unfortunately, an international source of revenue is likely to go much further than investors expected. International sales reached only C $ 2.7 million ($ 2.04 million) in the quarter ended December, or C $ 1.7 million ($ 1.28 million) more than last year .
Recently, members of the European Parliament approved a motion for a resolution on cannabis for medical purposes. The non-binding resolution will require member countries to prioritize cannabis research and reconsider national laws that prevent its sale.
A larger European market could help Canopy Growth make ends meet, but it will not happen fast enough to prevent this marijuana grower from bleeding money in the foreseeable future. This makes this stock too risky, even for the moment.