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Wednesday, October 21, 2020

Commodity Prices Drag on CANOPY GROWTH CORP COM NPV (OTCMKTS:TWMJF)

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CANOPY GROWTH CORP COM NPV (OTCMKTS:TWMJF) has been one of our favorite plays in the cannabis space over the past six months. We saw shares triple after noting that “It’s unquestionably one of the most promising plays in the cannabis patch in North America.” The key here is about dominance as a commodity producer. That said, commodity producers are subject to forces outside of their control: namely, fluctuations in the price of the commodity.

The falling price of legal marijuana is shaking up the dynamics of the marketplace, and represents the one major achilles heel for the big producers. According to a recent Forbes article, “Wholesale marijuana prices declined in 2016 from $2,500 to $1,000 per pound, with some dispensaries offering recreational ounces as low as $65 on CannaSaver.com,” said Brian Shapiro, Chief Executive Officer of CannaSaver. Shapiro said that grow houses flooded the market with cheap marijuana and subsequently drove prices down.

CANOPY GROWTH CORP COM NPV (OTCMKTS:TWMJF) is one of the bigger growers. The company produces and sells medical marijuana in Canada. It offers dry cannabis and oil products primarily under the Tweed and Bedrocan brands. It also sells its products through online.

According to company materials, “Tweed is the most recognized marijuana production brand in the world. It has built a large and loyal following by focusing on quality products and meaningful customer relationships. Tweed doesn’t just sell marijuana, it facilitates a conversation about a product we’ve all heard about but haven’t met intimately yet. It is approachable and friendly, yet reliable and trusted. As marijuana laws liberalize around the world, Tweed will expand its leading Canadian position around the globe.”

Also from their materials, “Bedrocan is the epitome of medical-grade cannabis. Bedrocan BV pioneered medical cannabis in Holland through decades of selection and refinement, leading to standardized, whole bud cannabis strains that patients can rely on. Bedrocan Canada supplies the same standardized strains to the Canadian market through exclusive licensing rights to the American continents, an arrangement it will also enjoy for all future genetic advancements. Due to its consistency over time, Bedrocan’s strains have been used in clinical research in seven European countries. That commitment to research didn’t stay on the east side of the Atlantic – Bedrocan Canada recently launched one of the largest clinical cannabis studies in the world, the EQUAL Study, to evaluate quality of life before and after medical cannabis use.”

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As noted above, the market may have some reason to temper its enthusiasm about big producers like TWMJF based on falling price trends for weed. However, the company’s continued financial performance is certainly tough to ignore. In their latest report, earnings on a net basis grew at 190% on a y/y basis. So, this company is likely going to continue to pile up the cash. The growth appears to be from operating margins improvement, which suggests they are getting better at doing what they do.

In an environment where inefficient production will get squeezed by falling end market pricing, that’s exactly what this company needs to continue to do. With nearly $100M in cash on the books, they should have the resources to invest in further optimization.

According to the Forbes article, Douglas Brown of Contact High Communications said that it wasn’t existing cultivators that tipped the market, but rather new and large entrants to the growing side. “At some point — and we are probably there now — flower becomes a commodity, like soybeans or corn. And then only the biggest players make any money selling it. Margins are thin, but they grow a lot of flower,” he said.

In the end, with TWMJF, we are dealing with a company now commanding a market cap of $1B. The balance sheet is in extraordinary shape ($92.8M of cash on the books versus just about $1.1M in total current liabilities). TWMJF is pulling in trailing 12-month revenues of $30.3M, representing huge top line growth, with y/y quarterly revenues growing at 180.1%. We still like the name, but one has to have an eye on the margins going forward. This is an exciting story, and we look forward to a follow-up chapter as events transpire. For continuing coverage on shares of $TWMJF stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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