Last week, pot stocks had their hottest streak since August, and there were several reasons for it. The market, in general, was up, and the passing of the farm bill helped, but investors mainly had great anticipation as companies like Aphria (NYSE:APHA) and Canopy Growth (NYSE:CGC) reported their latest quarterly earnings post-legalization of cannabis in Canada.
Aphria was up to bat first, and while its earnings were not as high as some analysts’ predictions, the financial report provided insight into how Canada’s recreational cannabis market is shaping up. With a fiscal quarter that ended November 30, the Aphria report included just a little over a month of recreational cannabis sales. Even so, those sales rose 92 percent, despite the slightly lower selling price of recreational versus medical cannabis — about CA$6.30 ($4.76) for recreational versus CA$7.50 ($5.66) for medical, per gram.
Aphria has done a so-so job of weathering recent accusations arising from the recent short-seller report produced by Hindenburg Research, with CEO Vic Neufeld becoming the company’s sacrificial lamb. However, the earnings report did its part to help the company recoup much of its recent stock price nosedive.
Canadian cannabis sales: The numbers are In, sort of
Investors eagerly await a report this spring that includes a full quarter of Canadian recreational cannabis sales — whether at Aphria, Canopy, or any company. Indeed, Canada is still working out some kinks, like its cannabis shortage and Health Canada’s licensing backlog.
For now, Canadian companies operate in a vicious cycle; companies like Aphria have delayed licenses which prevent them from helping to remedy the country’s cannabis supply shortage. Cannabis operations are up to each province, and some like Ontario have limited retail store openings because of the supply shortage. Most provinces say as the supply comes to fruition, they will begin to issue more licenses. However, some analysts are saying that the supply shortage in Canada could last up to three years.
Nevertheless, some large investors, like Tilray’s (NASDAQ:TLRY) largest shareholder Privateer Holdings, say kinks are just kinks and have put their money where their mouths are by staying in the game. Privateer Holdings owns about 75 percent of Tilray’s outstanding shares and announced last week it would not sell its shares for two quarters following the post-IPO lockup period expiration date. Privateer stuck with Tilray, and as a result, Tilray stock rose nearly 20 percent — a short-squeeze rally that helped the company weather the storm once investors began selling on Tuesday.
The tussle over Tilray
However, on January 15, Tilray shares fell back down more than 17 percent as other investors were able to cash out of their post-IPO lockup positions for the first time.
During a lockup period, insider investors are restricted from selling their shares for a specified period after a company’s IPO, and it is very common for investors to sell immediately after the lockup expires to reap their profits. Outside investors will also commonly sell to avoid the risk from the en masse post-IPO dump. None of this was unexpected, but Tilray suffered short term losses as a result.
Privateer is in, though, stating that it will not sell its Tilray shares in the first six months of 2019. Tilray also celebrated January 15 with a new partnering announcement with Authentic Brands, owner of well-heeled shoe brands like Nine West and Airwalk, to distribute and market marijuana products.
The cannabis beverage market
The Tilray partnership marks the latest in a series of strategic alliances by the company, which has already entered a joint venture to the tune of $100 million with beer brewer AB InBev to study cannabis-based beverages infused with THC and CBD. In fact, many analysts have stated that 2019 will be the breakout year for the cannabis-infused-beverage market.
Canaccord Genuity already made a bold prediction that these beverages might become 20 percent of the overall edibles market by 2022 and even outpace the general demand for marijuana products.
Everyone has jumped on the bandwagon. Heineken is producing Hi-Fi Hops cannabis-infused sparkling water, Molson-Coors and HEXO teamed up, and beverage giant Coca-Cola is eyeing the market.
Constellation Brands partnered with Canopy Growth on beverages as well but has not yet reaped the benefits of that partnership. After announcing a lower-than-expected profit due to higher-than-expected interest expenses from its investment in Canopy, Constellation saw its stock fall by double digits last week. Canopy stock fared better, rising by double digits to close at a $13 billion market cap on Friday.
All in all, the Canadian earnings provide great insight into not only what the Canadian market could shape up to be, but also what the U.S. market might become if cannabis were to be legalized nationwide. The Canadian market is very small compared to what the U.S. and international markets could be. Players big and small are looking at growth potential outside of Canada.