Aurora Cannabis (NYSE:ACB) is hitting its production stride, eight months into the legalization of recreational marijuana in Canada. ACB stock has dropped from its peak when Canada made pot legal as the reality of the situation has hit investors. There was no mad (or at least sustained) stampede to cannabis stores, and industry-wide there were production and distribution hiccups that lasted for months. Even now, there are supply shortages in the Canadian market.
Despite the opportunity to sell all the marijuana it can produce, Aurora is holding some back for inventory. Why? Wouldn’t selling it now improve the bottom line and boost Aurora stock?
The company is intentionally holding back marijuana it could easily sell now in anticipation of the next gold rush, expected in October. That’s when Canada will legalize cannabis-infused edibles and beverages. That is expected to be the next wave of growth for cannabis stocks like ACB stock — at least if the companies are prepared for the new opportunity.
Edibles Are the Next Big Canadian Cannabis Wave
The Canadian market for recreational and medical marijuana is predicted to reach US $5.9 billion by 2024. That’s a sizable amount of revenue up for grabs, which is why investors have been so interested in opportunities like Aurora Cannabis stock. There has been a slower start than initially expected, and first year sales of recreational marijuana in Canada may struggle to break the $1 billion mark.
However, even as the recreational pot market stats to hit its stride, there’s another big market about to open up in Canada: edibles and other cannabis-infused products. They were excluded from the initial legalization of recreational marijuana in the country, but the federal government has said regulations legalizing the products will be in place by October 17, 2019 — one year after pot was legalized — although products won’t be allowed on shelves until December. A report produced by Deloitte suggests the market for these next-generation cannabis products is worth US $2 billion.
Edibles appeal to consumers who are interested in recreational marijuana, but don’t want to smoke it. Besides the health aspects of eating or drinking as opposed to smoking, edibles are more discrete and don’t have the same tell-tale odor. They can also be used by consumers who live in apartments and condos that have banned smoking marijuana.
Producers can incorporate cannabis in edibles like gourmet chocolates that have considerably higher margins than the marijuana they are derived from.
Aurora Stockpiling Could Boost ACB Stock Later
Given the high value potential of the cannabis edibles market, it’s not surprising to learn that the big cannabis companies are making their moves to grab as much of it as possible.
Canopy Growth (NYSE:CGC) made headlines last week when it announced plans to produce over 800,000 cannabis-infused chocolates a month. It helps that the company bought an old Hershey chocolate factory…
Aurora has begun holding back marijuana inventory even though it could be selling it now. The plan is to ensure it has the raw material needed for a big launch of cannabis edibles, even though that means forfeiting some current sales. Aurora’s CFO told investors (via Global News):
“What we’re trying to do is learn from the challenges of the industry last year and the initial launch of consumer legalization — we absolutely have to have sufficient inventory to launch these products properly. So if that means taking a little bit of revenue out of Q4 and putting it into inventory, into new products, then that’s what we’ll do.”
In other words, Aurora’s march to profitability may be slowed slightly as it diverts some of its production to build inventory. And there will be startup costs once again. But with the coming legalization of cannabis-infused edibles in Canada, the expected demand for these products, and the ability to sell high priced gourmet versions, a lot of revenue is in play. It’s a bet, but a pretty safe one. And a bet that has a lot of upside for ACB stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.