The cannabis sector is in the middle of earnings season and the results have been less than optimal so far.
Earlier this month, Aurora Cannabis Inc. (ACB: TSX) (ACB: NYSE) traded lower after it reported third quarter financial results that missed expectations. After reporting earnings, several broker-dealers downgraded the stock or lowered its price target on it.
During the quarter, Aurora Cannabis reported to have generated $58.4 million of revenue, which was almost 20% lower than the same period last year (17% lower when compared to the prior quarter). Although we are concerned with the risks that were highlighted in the earnings report (price compression), the Canadian cannabis producer reported to have approx. $525 million of cash on the balance sheet (as of May 12th).
In order to stem the bleeding, Aurora Cannabis recently changed its strategy to focus on selling high-quality cannabis products and this represents a change from its previous strategy that was focused on selling cheap cannabis. The company said the reason for the change in strategy is related to the amount of competition from other low cost producers and the black market.
Going forward, we expect to see Canadian Licensed Producers (LPs) to further focus on the cannabis 2.0 market due to the margins that are associated with the sale of such products. Today we want to highlight 3 Canadian LPs that are highly focused on this vertical of the Canadian cannabis market and believe our readers should be aware of them.
Canopy and HEXO: Fighting for Market Share in the Beverage Market
When it comes to the cannabis beverage market, we are highly focused on Canopy Growth Corporation (WEED.TO) (CGC) and HEXO Corporation (HEXO.TO) (HEXO). The Canadian cannabis company has been able to capitalize on the cannabis 2.0 market by forming strategic relationships with leading alcohol companies Constellation Brands, Inc. (STZ) and Molson Coors Beverage Company (TAP), respectively.
Earlier this year, Marijuana Business Daily published an article that showed a significant increase in the amount of cannabis beverage revenue in 2020 (from a percentage of total US cannabis sales revenue standpoint). When compared to 2019, the increase in revenue is substantial and this is a trend that we expect to continue as cannabis continues to be accepted by and available to a larger part of the US population.
Through these relationships, Canopy Growth and HEXO are selling tetrahydrocannabinol (THC) infused beverages in Canada and cannabidiol (CBD) beverages in the US. Over the next year, we expect Canopy Growth and HEXO to generate more revenue from the sale of cannabis beverages and are following this trend.
As it relates to the long-term economics of the cannabis beverage market, we expect Canopy Growth and HEXO to benefit from the assets and the relationships that are associated with their respective beverage partners. We believe the partnership will support the focus on improving distribution and become more profitable (if the operators are able to execute).
Auxly is Capitalizing on the Cannabis 2.0 Vertical
Last month, Auxly Cannabis Group Inc. (XLY.V) (CBWTF) released fourth quarter and full year financial results and reported to have generated $18.3 million of net cannabis revenue. When compared to the same period last year, revenue spiked higher and we attribute the increase to Auxly’s cannabis 2.0 business.
Auxly has been highly focused on the Canadian cannabis 2.0 market and this has been a bright spot of the story. According to Headset Canadian Insights data (from January 9th), Auxly has captured 14% of Canada’s cannabis 2.0 market (from a product sales standpoint) and we are favorable on this vertical of the industry.
Of the revenue that was generated by Auxly in 2020, approx. 80% was related to the sale of cannabis 2.0 products. When compared to 2019, the company noticed an uptick in the percentage of sales from cannabis 2.0 products. The other portion of revenue was derived from what Auxly considers to be cannabis 1.0 products. Auxly’s cannabis 1.0 product category was led by Kolab Project flower and pre‐rolls and Robinsons dried flower (launched in the summer of 2020) and we will monitor how the business evolves this year.
If you are interested in learning more about Canadian LPs are focused on Canada’s cannabis 2.0 market, please send an email to firstname.lastname@example.org with the subject “Cannabis 2.0 Companies” to be added to our distribution list.
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