Shares of OrganiGram (NASDAQ:OGI) soared in January 2020, with OrganiGram stock rising from about $2 to nearly $3.50, after the struggling Canadian cannabis producer reported first quarter numbers that implied that the company may no longer be struggling.
Specifically, across the board, OrganiGram’s operating results improved dramatically in the first quarter of 2020. Revenue and volume trends, which had been declining for several quarters, bounced back in a big way. Gross margins, which had been eviscerated in the previous quarter, jumped back to far more normal levels. Perhaps most importantly, the company returned to adjusted EBITDA positive territory, after reporting a wide adjusted EBITDA loss in the fourth quarter.
But, since the huge post-earnings rip, OrganiGram stock has given back a healthy chunk of its gains amid concern that the numbers weren’t that good.
Of note, investors appear to be focused on the idea that the big first quarter turnaround was fueled by a reliance on lower-margin wholesale sales, and that this tailwind won’t persist for much longer. Investors are also concerned that, although sales and volumes did rebound in the first quarter, they rebounded to levels still below where they were a few quarters ago.
As investors have grown more weary of the company’s big quarter, OrganiGram stock has dropped from $3.50, to $2.50.
Zooming out, I think recent weakness in the stock is a buying opportunity. But only for those willing to take the risk. This is not a stock for the faint of the heart. It’s a high-risk, high-reward stock.
Having said that, from where I sit today, the risk-reward profile is starting to skew dramatically towards the reward side, and a potential pathway has emerged for OGI stock to double from here. Here’s how that could happen.
OrganiGram’s Fundamentals Look Good
All things considered, OrganiGram’s operating fundamentals are starting to improve in a big way. They will likely only get better the deeper we go into 2020.
There’s no denying the numbers here. The company’s growth trends are reversing course. Quarter-over-quarter, sales rose over 50% in Q1 (after declines in the two previous quarters). Kilograms sold rose about 90% (also on the heels of declines in the two previous quarters). Gross margins rebounded from 5% to 37% (yet again, on the heels of big declines in prior quarters). And, adjusted EBITDA pushed back into positive territory, after dropping into negative territory in Q4.
Bears are arguing that this trend reversal is short-lived, because it’s fueled by a one-time wholesale sales bump.
That is partially true. Among other things, OrganiGram’s trends improved in Q1 because of that. But, it’s also partially wrong, in that it misses the idea that further improvements are on their way.
Recreational 2.0 products are coming in 2020, including things like vapes, edibles and chocolates. The company is well positioned to introduce a flurry of rec 2.0 products. All of these new products will help sustain improving demand trends.
At the same time, aggressive cannabis retail expansion is underway in Canada. Ontario — Canada’s largest province by population — is set to issue new store authorizations at a pace of 20 per month. For comparison purposes, Ontario only has 27 stores open today. Quebec is adding roughly two new stores per week. British Columbia and Alberta are also ramping retail store expansion.
Net net, new products coupled with more retail stores will reinvigorate cannabis demand trends in Canada in 2020, and sustain the current rebound in OrganiGram’s sales, volume, margin and profit trends.
OrganiGram Stock Could Double
Assuming the company’s growth trends do continue to improve in 2020, then OrganiGram stock could double over the next several months.
In the big picture, there are four things to like about OrganiGram as a cannabis producer. First, they have a wide array of products which span the recreational and medicinal markets. Many of those products are among some of the top selling and most in-demand products in Canada. Second, management has been very disciplined with spending, and the company’s expense base is dramatically lower than that of peers. Third, the company’s production costs are among the lowest in the industry. Fourth, thanks to solid product demand and cost control, OrganiGram is one of the few cannabis producers that is already profitable.
To be sure, the company will likely never get that big. They don’t have a big sales base today. Their growing capacity is limited compared to peers. They also don’t have a huge multi-billion dollar investment to fuel big expansion initiatives.
But, given the four aforementioned advantages, OrganiGram should be able to grow nicely alongside the global cannabis market over the next few years, without significant liquidity or balance sheet risks (because the company is already profitable). Long term, that means it has visibility to turn into a stable, small cannabis producer with a healthy margin profile.
Assuming so, my modeling pegs OrganiGram hitting $1 in earnings per share by fiscal 2030. Based on a 16-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for OrganiGram stock of nearly $7.
That’s more that double the current price tag.
The Bottom Line
OrganiGram stock isn’t for the faint of heart. It’s a pot stock, and a small-cap pot stock at that. Naturally, that implies a ton of risk. If you’re not okay with risk, then skip the stock.
But, if you are okay with risk, then the stock could be a good pick for 2020. The company’s growth trends are already reversing course, and should continue to reverse course throughout the year thanks to new product launches and ton of new retail store openings. If these growth trends do continue to improve, the numbers add up so that OrganiGram stock could more than double.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
