What comes up must come down. Retail investors decided that low-priced pot stocks were worth buying and sent shares of Organigram (NYSE:OGI) surging as high as $6. But OGI stock is now retreating towards its 2020 levels.
The bad news is that the stock may still have further to fall. The good news is that the decline may create a buying opportunity for risk-tolerant investors.
Organigram is one of the smaller companies in the cannabis sector. Sometimes being small can work to a company’s advantage.
However, Organigram is struggling to become profitable in Canada, its home country. And if it can’t win in Canada, what are its chances of competing effectively in a growing international market?
That’s the issue which I’ll address in this article.
More Products Mean More Potential
Organigram is not ignorant of the problems it faces. In 2020, the company added 47 new products to its portfolio. And this year, it is introducing 14 more new products. More products mean more options for consumers.
In theory, the firm’s revenue growth should offset the increased production costs that will be a side effect of its substantially larger portfolio.
However, the company also announced that it is scaling up its production to respond to the rising demand for recreational pot in Canada. If Organigram can lower its per-unit production costs with economies of scale, its bottom line can climb meaningfully. And if the company can get closer to profitability, OGI stock could easily move higher.
But if it that scenario does unfold, would the company become the subject of takeover rumors again? As recently as 2019, Organigram was the subject of takeover speculation. But the rumors quieted down as cannabis made a comeback in 2020. However, with the industry in its consolidation phase, the takeover chatter will start up again.
Organigram Remains in a Precarious Position
According to Macroaxis, a digital-investment advisory service, Organigram has a 66% chance of filing for bankruptcy in the next two years. Of course, that doesn’t mean it will, but with any penny stock, bankruptcy has to be a concern.
To be fair, Organigram’s balance sheet does look better now. However, that’s mostly due to the company selling more shares. There’s nothing wrong with a pre-profit company doing that.
But with the cannabis industry beginning to move into the consolidation phase, Organigram will have to show that it can begin to generate the revenue that investors expect without diluting the value of its shares.
Don’t Bet on the Legalization of Marijuana
A factor boosting all cannabis stocks is the tantalizing possibility that the United States will legalize marijuana. But this seems to be a case of the cart getting ahead of the horse. While the current Congress is much more likely to legalize the drug than the last one, legalization is not a certainty. And the momentum towards legalization will slow down significantly if a bill is not passed in the first half of 2021. That’s because Congress will start campaigning in earnest in the latter part of this year.
OGI Stock’s Payoff Is Months Away
I think Will Ashworth wrote a great article that reminds investors to pay attention to the changes in Organigram’s management structure. These changes often take several months to bear fruit, and that will be the case for Organigram. That doesn’t mean you shouldn’t invest in OGI stock, but you should realize that this comeback will be a long-term process.
And that process is complicated by the fact that Organigram will likely continue to capture the attention of retail investors looking for a quick trade.
With that said, OGI stock remains a speculative bet. But with its stock trading around $3, it’s a much more realistic bet than it was when it was trading at $6. At the former price, the shares may be undervalued. At the latter level, the stock is overvalued by any measure.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.