The Bear Case For OrganiGram Continues To Widen

Shares of Canadian medical cannabis producer, OrganiGram (NASDAQ:OGI) have rallied impressively in the past three months. Short-term speculative investor interests have boosted the company and its peers. These gains have taken valuations for OGI stock and others to unsustainable levels. The lack of earnings and deplorable revenue growth numbers makes OGI stock unattractive right now.

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Across all major price metrics, OGI stock is considerably overvalued. For example, its forward price-to-sales ratio of 15.6 exceeds the sector median by more than 94%. Additionally, its forward enterprise-to-sales ratio of 15.4 exceeds the sector median by about 109%.

With weak fundamentals and a lack of revenue growth drivers, the stock is nothing more than a short-term play. It would be better for investors to go for US weed stocks for better value and exposures to future upsides. With that being said, let’s analyze OrganiGram’s current state in more detail.

Horrible Quarterly Results

The company recently reported deplorable first-quarter results for fiscal 2021. Net revenues tanked 23% year-over-year due to a massive decline in wholesale revenues. A 30% jump in recreational sales was unable to offset the debacle in its wholesale business. As a result, gross margins were at a negative 30%, which reflects the current production challenges, lower selling prices, the weaknesses in its product assortment.

OrganiGram has done relatively well in reducing operational issues and changing cultivation methods to match consumer demands. Additionally, it has also reduced its workforce significantly, which ultimately impacted its production schedules. Moreover, it introduced a new product line called SHRED, which effectively targets price-conscious customers. Though it’s not the first company to explore this idea, it could make a lot of money in this niche.

In terms of financial flexibility, the company has done well to fortify its balance sheet. It has narrowed its cash burn to almost break-even levels. It has also cut back significantly on its capital expenditures in an oversupplied Canadian market. Additionally, it added $79 million in cash during the quarter, with a $60 million term loan.

It raised $69 million in November last year by issuing 37 million shares.  It appears that OrganiGram should have sufficient financial flexibility given the sizeable reduction in its capital expenditure and cash burn. With its rising share price, the company would want to take this opportunity to raise more equity.  However, it’s more important to develop a road-map to grow its revenues sustainably.

Outlook on OGI Stock

OrganiGram struggled last year due to the deflationary pricing environment in Canada and the evolving consumer preferences. Accordingly, it had to cut down prices which killed its margins. Demand isn’t slowing down in the Canadian market, though, as sales almost doubled in 2020, reaching 2.8 billion CAD. Therefore, OrganiGram and its peers will benefit from the improved demand.

However, the company has struggled primarily due to its ineffective product development and quality. Due to its execution hiccups, sales have failed to accelerate in line with its peers and the broader market.

At this point, it seems unlikely that it would be able to turn around its performance anytime soon. The market is highly competitive and oversupplied, which might take years before the excess capacity is cleared out.

Canadian pot producer OrganiGram has enjoyed success at the stock market for no apparent reason. It has attracted a lot of short interest, along with other Canadian limited partnerships. However, OGI Stock is an incredibly weak investment with little long-term potential from a fundamental standpoint. Additionally, the stock is considerably overvalued now, which further limits its attractiveness.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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