There is more than one way to get involved in the marijuana industry gold rush. Some investors prefer the (relative) stability of an established competitor, while others are keen to buy smaller stocks that have more room for growth. If the second category sounds like your style, you’ve come to the right place.
OrganiGram Holdings (NASDAQ: OGI) is one of the smaller, scrapper cannabis companies out there, and it can go all the right places. While still trying to reach cruising speed in its home market, Canada, it has recently struggled to keep up with demand. And, her international ambitions are only starting to blossom, which means she could have significant and long-term potential. But, is March the right month to invest, given that its last earnings report was filled with less than good news?
The good news
Overall, the company is moving in a favorable direction by increasing its market coverage and revenue potential. The past year has been a blitz for OrganiGram’s portfolio, which has grown to a total of 47 new cannabis products. And it plans to launch around 14 new products this quarter, which will help it match its offerings with what consumers are looking for. Pushing so many new vaporizers, edibles, and cannabis flower products at once can drive up costs, but if it leads to stronger brands and consumer loyalty, it will be worth it in the long run.
There is reason to believe that OrganiGram’s products will also outperform others in their perceived quality. Its Edison brand recently won several prestigious awards for its dried marijuana flowers and emulsified cannabis oils, which bodes well for consumer adoption.
Another positive element is that the company is increasing production in response to growing consumer demand in the Canadian recreational market, as well as the perceived benefits of economies of scale. If this decision is successful, production costs should drop and revenues should rise, which could subsequently boost the stock’s growth. Management’s plans could take a quarter or two before shareholders see any positive changes in earnings reporting. In the meantime, retail investors are interested in the stock, which could have favorable consequences in the long term.
Finally, at the end of 2020, OrganiGram’s financial strength improved considerably. Its long-term debt fell 48% in the last quarter thanks to a payment of $ 55 million. The money for that payment came from a stock offering in November, which grossed $ 69 million.
The less good news
While it is true that OrganiGram’s adult usage segment generates more revenue over time, total net income has fallen 23% year over year and the company is not. profitable. At a time, cost of sales increased by 47%, and selling, general and administrative (SG&A) expenses increased by 18%. These rising expenses may be related to ongoing scale-up efforts, so they’re not necessarily a cause for alarm – yet. Likewise, the decline in total net income is linked to the decline in cannabis selling prices and wholesale income compared to the previous year. If revenue growth stagnates quarter over quarter this year, investors could have a problem on their hands.
Then there is the fact that the company has adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) collapses 212%, while its adjusted gross margin plummets 30% to 10%. Keep in mind that the prefix “adjusted” before these measurements indicates that the figure has been recalculated in light of changes to the fair value of cannabis products in inventory. So even by making concessions on price fluctuations, other problems arise in the efficiency of the business.
Until management demonstrates that revenues actually increase while costs decrease – potentially in a quarter or two – OrganiGram is a bit too risky for me to recommend buying without reservations. In addition, I am interested to see how its newly launched products are successful in gaining market share in Canada.
On the flip side, if you are interested in going downstairs with a growing cannabis stock and are comfortable with a riskier investment, OrganiGram is a good option to buy this month. . Don’t be too surprised if you end up waiting awhile for its gains to start on an undeniably positive trajectory.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.[ad_2]