Earnings season is around the corner for the Canadian cannabis sector and we forecast volatile responses from the market in the months ahead.
Based on the last few quarters, we can expect to see several operators report numbers that exceed expectations while the majority of businesses report minimal revenues and lower cash balances.
Going into earnings, we have mixed expectations in regard to Canadian cannabis producers and believe that the industry has gone through a major transformation. In late 2019, Health Canada legalized cannabis derivative products such as edibles, vaporizers, infused beverages, topicals, and more. These products are referred to as cannabis 2.0 and the market expected the vertical to prove to be a major revenue generator for the sector.
Leading Canadian cannabis producers like Canopy Growth Corporation (WEED.TO) (CGC) and Aurora Cannabis Inc. (ACB.TO) (ACB) have not been the greatest beneficiaries of the cannabis 2.0 movement and this came as a surprise to us. Due to the infrastructure that these operators have, we would have expected them to be selling cannabis 2.0 products like they were going out of style.
Surprisingly, Indiva (NVDA.V) (NVDAF) has been one of the greatest beneficiaries of the cannabis 2.0 market and has benefited from having a relationship with Wana Brands, the largest cannabis edible brand in the US. After Indiva launched the product line, we saw a spike in interest in the business and this is a trend to be aware of.
A few months ago, Indiva launched Sour Wana Gummies in several key Canadian provinces and we expect the company to benefit from the relationship with the leading US cannabis edible brand. The company has been forming agreements with additional provinces and we are bullish on how the management has been distributing the product.
When it comes to quarterly financial results for Canadian cannabis companies, we expect the market to focus on certain key metrics that include:
- Revenue – Percentage of growth when compared to the prior quarter and the vertical that the revenue is coming from
- Balance Sheet – How much cash and debt does the company have and do they have the resources that are needed
- Growth Prospects – Is the business bringing new products to market or is it recording organic growth
Over the next year, we expect see further consolidation and would not be surprised if a major transaction was reported as part of a company’s quarterly earnings report. If merger and acquisition activity slow down, we expect to see additional companies file for bankruptcy, and this is a trend that our readers need to be aware of.
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