A tectonic shift is taking place in the cannabis industry and we expect the trend to have a major impact on operators that are levered to it. 

During the last month, we have analyzed the last two years of quarterly financial reports that were released by high-profile Canadian Licensed Producers (LPs) and United States (US) multi-state operators (MSOs). 

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The trend in the earnings reports was clear. While several Canadian LPs are generating considerably lower revenue when compared to prior quarters, US MSOs are reporting impressive revenue growth. 

In 2022, we expect US MSOs to continue to report above-average revenue growth as new medical and recreational cannabis markets open and mature. For this reason, we have been surprised by the recent pressure on the US cannabis sector and want to provide more context on the comparison of Canadian LPs and US MSOs.

Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) and Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB) are two of the most recognizable names in the Canadian cannabis industry. In April 2019, the combined market capitalizations of the two Canadian LPs were more than $26 billion (USD). 

Of the $26+ billion, Canopy Growth was valued at approx. $17 billion while Aurora Cannabis was valued at approx. $9.1 billion. Prior to the companies trading at these peak valuations, each Canadian LP was reporting strong revenue growth and was creating a narrative that lead us to believe that each business would soon be profitable. 

Unfortunately, the Canadian cannabis industry did not mature as fast as many had expected and LPs started to report quarterly financial results that missed expectations. The miscalculation forced companies like Canopy Growth and Aurora Cannabis to close facilities to cut costs and be more aligned with demand. 

Aurora Cannabis’ fiscal year ends on June 30th which is why we use this date to analyze its annual performance results. In the fiscal year that ended on June 30, 2020, the Canadian LP generated $278.9 million of revenue. In the following year, this number declined to $245 million of revenue and this is a trend that we expect to continue. 

On a quarter-over-quarter basis, Aurora Cannabis reported lower revenue in the period that ended on March 31st and June 30th. Although revenue increased in the quarter that ended on September 30th, the amount was less than the reported amount for the quarter that ended on December 31, 2020. 

Although Canopy Growth has reported strong revenue growth on a year-over-year basis for several years, profitability has been a major concern with the business. When a business is valued at more than $16 billion, it is expected to be profitable or to become profitable. 

Canopy Growth’s fundamental performance is much less pretty when you analyze the business on a quarter-over-quarter basis. The company’s fiscal year ends on March 31st and the decline in total revenue started after the quarter then ended on December 31, 2020. 

During the quarter that ended on December 31st, the Canadian LP reported having generated $152.2 million of revenue. In the quarters to follow, total revenue declined to $148.4 million for the period that ended on March 31st, $136.2 million for the period that ended on June 30th, and then to $131.1 million for the period that ended on September 30th.

In the case of Canopy Growth, profitability has been impacted by the COVID pandemic and a miscalculation of the potential market size in Canada and in certain international markets. By closing facilities and writing off billions worth of assets, the management team is working to make the business profitable. 

Although the management team has been focused on profitability, the market has not been impressed with how this aspect of the story has advanced. There has been a significant amount of management turnover at Canopy Growth which has raised a red flag with the market. 

The US Cannabis Industry is Expected to Continue to Grow

When it comes to US MSOs, the growth trend is much different and we are bullish on the potential catalysts that are associated with the market. Over the next year, we expect US cannabis operators to continue to report strong growth and believe our readers need to be aware of this. 

If you look at the recent acquisitions by Canadian LPs, you will notice that a large majority of the transaction have been of US companies. By acquiring hemp and cannabidiol (CBD) operators in the US, Canadian companies can be positioned to capitalize on the cannabis industry when federal regulations change. 

We attribute the recent volatility in the US cannabis industry to the SAFE Banking Act not being included in the National Defense Authorization Act (NDAA). We believe the recent weakness is transitory and will monitor the trend into year-end. Next year, we expect the regulatory environment for the US cannabis industry to improve and believe this is a key potential catalyst for the sector.