Gauging Canadian Marijuana LP's off of current earnings results is a fool's errand. So much capital has been put into attempts to ramp up production, while the benefits of that production have yet to materialize. Many are watching names like Aurora Cannabis (ACB) and Canopy Growth (CGC) this week, as they reported earnings results. I think the exercise is going to be mute. "Pot stocks" are not trading realistically in relation to their actual monetary value. They haven't been for quite some time. Aphria (APHA) , a name I do own, has gotten closer thanks to bearish pressure from short seller accusations (not something my portfolio enjoyed very much), but it still costs a lot relative to the financials we've seen.
Canopy Growth reported revenue growth of 282% to C$83 million. Obviously no complaints can be made about that, and it bodes well for the company's ability to take full advantage of recreational legalization. Of Canopy's C$83 million in sales revenue, C$71.6 million came from recreational sales within Canada. That demonstrates the potential strength of focusing on domestic operations. At the same time, these sales weren't profitable at all. Losses from operations were C$157.24 million vs. C$26.03 million in the year prior. The operating loss is related to huge increases in sales and marketing expenses, as well as General and Administrative and share based compensation expenses. Indeed, Canopy relied on non operating income to produce a profit for shareholders; including a fair value gain of C$185.8 million on senior convertible notes, as well as a C$36.4 million gain on financial assets. The money did not come from cannabis sales.
I don't think the spending is going to stop any time soon. With a developing hemp market in the State of New York, Canopy has plans to invest over C$100 million there. Of course, Canopy certainly now has the money to spend thanks to its massive investment from Constellation Brands (STZ) . I am not opposed to investment, as properly developing your business now will allow you to position yourself ahead of competitors down the road.
Aurora Cannabis reported fiscal Q2 earnings after market close yesterday. The sales growth was quite something. Revenue from sales increased roughly 490% year over year to C$59.4 million, with net revenues of a little over C$54 million. The sales growth is impressive, but not surprising when you take into account the addition of recreational sales revenues. Most of these LP's are reporting big sales gains. In relation, the costs being incurred in production ramp up, along with administrative and business expenses, are still exceeding the gain. Aurora reported an operating loss of C$80.2 million. Thanks to a C$110 million loss from derivatives, along with a C$69 million impairment in investments, the company's net losses totaled C$239.64 million; with net losses attributable to Aurora at C$237.8 million. Breaking down to C$0.25 in losses per diluted share, the quarter did not demonstrate a clear path to profits.
Drama over executive departures and accusations of questionable dealings notwithstanding, Aphria reported a very similar story. Revenue jumped a big 156% in its most recent earnings results, with operating losses of C$21.55 million. The company managed to report positive net income thanks to gains on investments. Breaking from the herd, Aphria reported net income of C$54.7 million, breaking down into C$0.22 per diluted share. Even with a 450% increase in earnings per share, Aphria is not displaying a clear financial performance that can be used in understanding the stock's performance. The earnings came from investments, while the actual business lost money.
I think it's going to take until the second half of the year for us to clearly see which players are winning in this sector. These companies need to get their supply to a point that meets demand, and the rising costs associated with scale. Right now they are speculative growth stocks through and through. Most of them have also diluted their stock at some point in order to raise capital for production and marketing. They've all taken big losses. The only way to try to gauge which are performing better than rivals is through sales growth and production capacity. Even then it's a bit difficult to tell which of the big names are doing the best. To me, it's becoming a question of which producer will dilute their stock the least in the efforts to produce strong profitability. I'd give points to Canopy here, as the C$4 billion cash position gives them a lot of wiggle room.
Overall, investing now is speculative at best. I do own shares in Aphria, but I bought them during the most recent pullback with the express knowledge that I wasn't buying based on any real valuation. It will only be after all production facilities are completed, and LP's have time to really get their sales trends that we'll understand these stock prices.