In October of 2018, Canada legalized cannabis for recreational use. In the months leading up to this, Canadian cannabis stocks soared in anticipation. However, since then they have grossly underperformed the broader markets in the last two and a half years.
In 2021, most Canadian stocks continue to trade significantly below their record highs. These companies have been impacted by lower-than-expected demand, negative profit margins, and overvalued acquisitions.
Yet, some Canadian cannabis stocks have staged somewhat of a comeback in the last few months. Today I’ll analyze two such Canadian cannabis stocks: Tilray (TLRY) and OrganiGram (OGI).
Tilray (TLRY)
Shares of Tilray have risen 69% year to date (YTD) valuing the company at a market cap of $6.4 billion. Tilray recently completed its merger with Aphria making the combined entity the largest Canadian cannabis company in terms of revenue.
In its fiscal fourth quarter of 2021 ended in May, Tilray reported net sales of $142.2 million compared to analyst revenue estimates of $199 million. While it posted an operating loss of $73.7 million, Tilray derived $121.5 million in non-operating income allowing the company to end Q4 with a net profit of $33.6 million or $0.18 per share. Comparatively, Wall Street forecast the company to post a net loss of $0.12 per share.
Tilray’s adjusted EBITDA grew 285% year over year to $12.3 million while its free cash flow rose over 100% to $3.3 million. Tilray has confirmed it has already achieved $35 million in cost synergies post its merger and is on track to save $80 million in the next 16 months.
The company enjoys a 16% market share in Canada’s cannabis market and its subsidiary Manitoba Harvest delivers CBD wellness products to 17,000 stores in North America, making it a market leader with a diversified revenue base.
OrganiGram Holdings (OGI)
OrganiGram too disclosed its fiscal third quarter of 2021 results recently and reported net revenue of $20.3 million for the period ended in May. This indicated a sequential increase of 39% year over year compared to sales of $14.6 million in fiscal Q2.
While OGI stock spiked soon after its quarterly results, it has since lost over 12% in market value in the last three weeks. Despite the pullback, OGI has returned 87% to investors year to date.
But investors should note that OrganiGram’s profit margins do not inspire confidence. In Q2, the company reported a gross loss of $17.2 million. While its gross profit improved to $2.1 million in the May quarter it was on the back of fair value adjustments. OGI confirmed it does not expect gross margins to improve in Q4 but claimed the management team has identified multiple cost efficiency opportunities that will be implemented going forward.
In fiscal Q3, OGI’s operating expenses totaled $13.6 million accounting for 65% of net sales. The company ended the quarter with less than $200 million in the bank which suggests it will need to raise additional capital in the upcoming months which will dilute shareholder wealth.
TLRY shares were unchanged in after-hours trading Wednesday. Year-to-date, TLRY has gained 69.01%, versus a 18.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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