Big Revenue Change from a Big Cannabis Broker

GMP Securities, the go-to bank for the cannabis industry, downgraded its 2019 revenue estimate for Canopy Growth by 40% today citing lower market share expectations.

Legal market sales are starting out slower than the bank previously expected due to understaffed government stores, logistical issues, and supply shortages.

GMP now thinks Canopy will achieve a 20% market share for the year ending March 31, 2019 compared to a previous estimate of 33%.

In GMP’s view, Canopy is chasing a market share strategy focused on depth, not breadth. This means Canopy would rather list fewer strains and make sure they are always in stock than offer more products that sometimes sell out.

This is a commendable strategy for the consumer, but GMP is worried consumers will have fewer opportunities to encounter a Canopy brand, decreasing market share in the first year of legalization, which is reasonable.

 

Does the Estimate Change Matter?

So do GMP’s new estimates mean they see the cannabis market turning out differently over the next two years?

The short answer is no.

GMP now thinks Canopy will own less of the market at the start, but the overall size of the cannabis market in Canada will remain the same.

GMP thinks legal market sales will total 185,000 kg (20% legal market share) for the year ending March 31, 2019, growing to 325,000 kg (35% legal market share) 12 months later.

The market is only just getting started and GMP was simply too optimistic about the speed of the legal rollout.

Canopy’s revenue may have effectively been cut in half, but this research report is only looking at the short-term. The longer-term value from exploding cannabis sales has not changed.

If bank estimates are too rosy it is healthy for market expectations to rebalance, we hope to see lowered estimates across Bay Street so cannabis companies have a chance at exceeding expectations once the legal market is operating like a well-oiled machine.

 

How to Read this Report

A 40% cut to revenue is never a good sign for market fundamentals, but in the short-term, the rollout of the legal cannabis market was never going to be smooth.

Legal cannabis has never been done on the scale being attempted by Canada and there were bound to be operational bumps along the way.

Don’t be surprised if other analysts temper their expectations and lower estimates for the early days of legalization.

Revenue and earnings in the first quarter of legalization will likely also disappoint.

Look through these events and stay focused on the long-term potential of a globalizing cannabis market.

 

A Sell-off Creates Opportunity

Grizzle has always looked at the market over a multi-year time period to avoid fluctuating valuations due to short-term market issues that will eventually be worked out.

Having conviction in the long-term potential of cannabis will allow you to deploy capital to take advantage of lower prices or hold so you can benefit from the eventual rebound.

We recommend investors pick and choose their stocks carefully here as not all cannabis companies are created equal.

Low production costs will matter above all for the first 12-18 months of legalization, Aphria is the clear winner on this metric.

In 2020 and beyond, an attractive product pipeline of drinks, edibles, and other value-added products will determine success. We like CannTrust with their deep bench of future product offerings.

The market bloodbath we find ourselves in also is opening up opportunities to pick up US cannabis retailers at reasonable values.

Large US operator iAnthus, operating in over 10 states and newly public Curaleaf are our preferred ways to play the eventual federal legalization of cannabis in America.

Analysts earnings cuts may look ominous, but look through the short-term headlines and we think investors will be rewarded for their patience.