For many marijuana stocks, the summer of 2017 hasn’t been what you’d call a scorcher — at least not so far. That’s especially the case in comparison to the huge run-ups experienced last year.
However, three marijuana stocks have sizzled this summer. Shares of Aphria(NASDAQOTH:APHQF), Aurora Cannabis (NASDAQOTH:ACBFF), and Canopy Growth Corporation (NASDAQOTH:TWMJF) are up by at least 20% since June 20, the official beginning of summer. Here’s why these hot marijuana stocks could get even hotter.
Improving financials
All three of these stocks have at least two things in common. First, they’re all licensed medical marijuana providers in Canada. Second, each has reported improving financial results.
Aphria’s revenue grew to $20.4 million in its fiscal year ending May 31, 2017, more than double the prior-year period total. The company’s EBITDA in its most recent quarter soared 181% year over year to $2.8 million. Aurora announced third-quarter revenue in May of $5.2 million, a whopping 2,500% jump over the same period in 2016 and a 33% increase from the second quarter of this year. Canopy Growth recently announced fiscal year 2017 revenue of $39.9 million, more than triple the level from the previous year. Although the company posted a net loss for the year, investments in expansion were the primary cause.
Continued momentum appears to be likely for all three companies. The medical marijuana market in Canada is projected to grow to more than $1.1 billion by 2020. In 2016, the market was estimated at only $126 million.
Going global
Another major growth driver for these Canadian marijuana companies is the international market. Germany legalized medical marijuana earlier this year, but the country will import marijuana until it can establish a program for marijuana cultivation.
Aurora Cannabis bought Pedanios GmbH, a leading German wholesale importer, exporter, and distributor of medical cannabis in May. Canopy Growth acquired Germany-based MedCann last November and now operates in Germany as Spektrum Cannabis Germany. The company is already reporting rapidly growing sales in the German market.
Aphria also has its eyes on the German market, but has been more aggressive in expanding to the U.S. market. The company has a stake in Arizona medical marijuana provider Copperstate Farms and recently acquired Florida medical marijuana grower Chestnut Hill Tree Farm.
The real prize for Aphria, Aurora, and Canopy Growth, however, is back at home. Prime Minister Justin Trudeau is attempting to fulfill his campaign promise to legalize recreational use of marijuana in Canada. His goal is for recreational marijuana to be available in the country by July 2018.
How big could this market be? Professional services firm Deloitte predicts that the annual retail marijuana market in Canada could be at least $4.9 billion and perhaps as high as $8.7 billion. Consider that Aphria, Aurora, and Canopy Growth are three of the largest current suppliers of medical marijuana in the country — but their combined annual revenue is less than $100 million right now.
There are a few obstacles in the way of Trudeau’s plan. Some provinces are concerned that there isn’t enough time to effectively handle some of the challenges of implementing legalization by next July. However, the Canadian government appears set on sticking with its original time table.
Heating up
My prediction is that all three of these marijuana stocks will heat up considerably in the coming months. That doesn’t mean, though, that the ride won’t be a bumpy one. Any hiccup in the process for legalizing recreational marijuana in Canada or in the companies’ international expansion efforts could cause share prices to sink, even if only temporarily.
Aphria trades at more than 40 times sales. Aurora Cannabis trades at over 67 times sales. Canopy Growth is the “cheap” stock, with its share price at 34 times sales. These are all multiples that would be typically viewed as stratospheric valuations if they applied to earnings, not sales.
Huge expectations for growth are already priced into the valuations of each of these stocks. It’s possible that the companies will achieve the necessary growth over the long run to make investors happy with the opportunities in Canada and elsewhere. It’s also possible that they won’t. Over the near term, though, I think the momentum will continue for Aphria, Aurora, and Canopy Growth. These Canadian stocks could carry some of the heat of summer well into fall and winter.
credit:fool.com
