While the cannabis industry celebrated in Canada this year; many investors overlooked the fact that the country still cannot meet the demand of both existing medical marijuana patients and new recreational consumers. Conversely, other pot stocks invested too much in growing and lost focus on what it means to sell cannabis in a legal market.
Hindenburg Research caught Aphria, and the entire market off-guard, turning what should have been a celebratory year’s end into a mad scramble for survival.
As 2018 comes to a close, it may be high time for cannabis investors to go back to the fundamentals and perform some due diligence. By this time next year, it will not be about who grew the most pot or built the finest retail store. The marijuana stocks which come out on top will be the companies who understand the plant, the customer, and the industry from the ground up.
It is time to take a look at that portfolio and lose marijuana stocks that do not understand the cannabis industry.
MedMen Inc. (CSE:MMEN) (OTCQX:MMNFF), taking the “Apple Store of weed" claim to the next level, announced Thursday that they would appoint former Apple Retail financial officer Michael W. Kramer as their new Chief Financial Officer. But no one ever said that selling marijuana would be anything like selling smartphones, and cannabis investors should be wary of a pot stock that thinks retail experience is the only thing driving the cannabis industry.
The company’s goal is still fifty retail stores by 2020, and the first quarter of 2019 has them operating a total of fourteen so far. But MedMen tends to focus primarily on the high-end retail experience of cannabis, taking away from their ability to vertically control their supply to meet this growing demand. Investors may note that MedMen’s revenue jumped nearly 1100 percent over last year, but that percentage does not cover the $96.6 million in total losses MedMen netted in 2018. That net loss is due in part to the massive amounts of money they are pouring into new retail locations, not to mention the cultivation facilities they need to build to supply their future fifty storefronts.
At this point, it is clear that MedMen Enterprises will not be boasting in any real profit until they can finish the facilities they need to make their expensively unique retail experiences a reality. Cannabis investors should not sit on their hands and wait on this pot stock. Their time and money are better invested elsewhere this holiday season.
When it comes to growing too much pot, Aurora Cannabis (TSX:ACB) (OTCQB:ACBFF) looks the most guilty. The company is on track to produce nearly 700,000 pounds of cannabis per year, but it is not their homegrown flower. Rather, Aurora acquired many different companies this year to boost their production, including this summer’s record-breaking merger with MedReleaf.
While acquisitions look good for Aurora’s cultivation capacity, it brings one fearful word to mind for investors: dilution.
Aurora’s acquisition of MedReleaf and many other companies this year are share-based deals. It means that Aurora issued out common stock in the company instead of paying cash for these acquisitions. While this strategy works best for the direct shareholders of the companies involved, it will be the day traders and other investors who have the most to lose. Especially when there is speculation in the cannabis industry that Aurora has upwards of one billion shares outstanding.
With that much dilution waiting in the wings, cannabis investors need to question whether or not Aurora understands the cannabis industry to be more than just growing weed.
Despite making history as the first company approved by the FDA to sell a cannabis-based medicine, GW Pharmaceuticals (NASDAQ:GWPH) might have peaked a bit early. The initially optimistic sales projections for its drug Epidolex were lofty at best. The medicine only treats two very rare forms of childhood epilepsy, and with annual costs over $32,000, it is unlikely that patients or their insurance companies will be willing to pay that much for a controversial treatment.
From a numbers standpoint, GW Pharmaceuticals did report a $4 million increase in revenue over last year, coming in at $12.7 million for 2018. But their net loss came in at $295 million, almost $150 million more in losses than last year. It seems that the research, development, and marketing of cannabis-based medicines comes with a hefty price tag that investors are going to end up paying for later. Limiting cannabis to a pharmaceutical that can only be marketed to two types of patients demonstrates a lack of understanding when it comes to this industry and its consumers.
With medical marijuana markets exploding in states like Ohio and Florida, it is a mystery why GW Pharmaceuticals is only focusing on one kind of cannabis for one kind of treatment. Investors who jumped on this pot stock early may come to regret their decision by this same time next year.