To be fair, reading a Canadian cannabis grower's income statement should require a degree in accounting, because the statements are often filled with a number of one-time benefits, costs, and fair-value adjustments.
For instance, Canadian pot companies adhere to International Financial Reporting Standards (IFRS) accounting. In simple terms, that just means marijuana is treated as an agricultural product and, as such, these growers are required to revalue their crops throughout different stages of the growing cycle, as well as estimate the cost to sell their product, often well before they actually sell their harvest. IFRS accounting leads to a lot of guesswork, and in the early going it's also led to some pretty hefty upward lifts in pot stock bottom lines.
However, if we were to remove these smoke-and-mirror accounting tactics and focus solely on net revenue (less excise taxes) and operating expenses, the bottom line is that marijuana's "Big Three" are losing a lot of money on an operating basis in fiscal 2019.
Aurora Cannabis, which is six months into its 2019 fiscal year, reported an operating loss of $192.1 million Canadian in mid-February. Canopy Growth, the largest pot stock by market cap, has lost CA$402.6 million on an operating basis through the first nine months of fiscal 2019. Lastly, Aphria has racked up CA$31.9 million in operating losses through the first six months of fiscal 2019. Added up, that's CA$626.5 million in operating losses so far in 2019, or $471 million U.S. dollars. At this pace, even with rapid sales growth, it's possible that Canada's biggest pot stocks may lose in excess of $700 million on an operating basis, combined, in fiscal 2019.
Image source: Getty Images.
Be prepared, because "show me" time is coming
Investors might be inclined to point to the most famous case of operating losses that were somewhat meaningless in the early going: Amazon.com. However, Amazon was building itself into a powerhouse in niches that simply didn't exist before. The cannabis industry has existed (at least illegally) for a long time, making the comparison that of an apple and an orange. Instead, investors should understand that Wall Street's patience with big losses will eventually grow thin, and that a "show me" state of mind is bound to take over sooner rather than later.
Aurora Cannabis, while purportedly on track for recurring positive EBITDA (earnings before interest, taxes, depreciation, and amortization) by the fourth quarter of its current fiscal year (April 1-June 30), is far from a shoo-in to generate a meaningful profit anytime soon. The company's growth-at-any cost strategy has seen it acquire one company after another and dilute investors in the process. With around 1 billion shares outstanding, Aurora would have to make a lot of money just to pass spec with fundamentally focused investors.
The wait for Canopy Growth to turn a profit is probably going to be even longer. Canopy's push into international markets, its strategy of acquiring complementary businesses, and its spending on new products and marketing, could keep the company running in the red on an operating basis until 2021. Even with Constellation Brands thought of as a possible acquirer of Canopy Growth, maintaining a $16 billion valuation with persistent losses could prove impossible.
Then there's Aphria, which is still attempting to overcome a loss of shareholder trust from early December. With no major partner as of yet, and a similar share-based dilution problem as with Aurora and Canopy, meaningful per-share profits could be a ways off.
Long story short, you should probably temper your expectations for the industry.
For instance, Canadian pot companies adhere to International Financial Reporting Standards (IFRS) accounting. In simple terms, that just means marijuana is treated as an agricultural product and, as such, these growers are required to revalue their crops throughout different stages of the growing cycle, as well as estimate the cost to sell their product, often well before they actually sell their harvest. IFRS accounting leads to a lot of guesswork, and in the early going it's also led to some pretty hefty upward lifts in pot stock bottom lines.
However, if we were to remove these smoke-and-mirror accounting tactics and focus solely on net revenue (less excise taxes) and operating expenses, the bottom line is that marijuana's "Big Three" are losing a lot of money on an operating basis in fiscal 2019.
Aurora Cannabis, which is six months into its 2019 fiscal year, reported an operating loss of $192.1 million Canadian in mid-February. Canopy Growth, the largest pot stock by market cap, has lost CA$402.6 million on an operating basis through the first nine months of fiscal 2019. Lastly, Aphria has racked up CA$31.9 million in operating losses through the first six months of fiscal 2019. Added up, that's CA$626.5 million in operating losses so far in 2019, or $471 million U.S. dollars. At this pace, even with rapid sales growth, it's possible that Canada's biggest pot stocks may lose in excess of $700 million on an operating basis, combined, in fiscal 2019.
Image source: Getty Images.
Be prepared, because "show me" time is coming
Investors might be inclined to point to the most famous case of operating losses that were somewhat meaningless in the early going: Amazon.com. However, Amazon was building itself into a powerhouse in niches that simply didn't exist before. The cannabis industry has existed (at least illegally) for a long time, making the comparison that of an apple and an orange. Instead, investors should understand that Wall Street's patience with big losses will eventually grow thin, and that a "show me" state of mind is bound to take over sooner rather than later.
Aurora Cannabis, while purportedly on track for recurring positive EBITDA (earnings before interest, taxes, depreciation, and amortization) by the fourth quarter of its current fiscal year (April 1-June 30), is far from a shoo-in to generate a meaningful profit anytime soon. The company's growth-at-any cost strategy has seen it acquire one company after another and dilute investors in the process. With around 1 billion shares outstanding, Aurora would have to make a lot of money just to pass spec with fundamentally focused investors.
The wait for Canopy Growth to turn a profit is probably going to be even longer. Canopy's push into international markets, its strategy of acquiring complementary businesses, and its spending on new products and marketing, could keep the company running in the red on an operating basis until 2021. Even with Constellation Brands thought of as a possible acquirer of Canopy Growth, maintaining a $16 billion valuation with persistent losses could prove impossible.
Then there's Aphria, which is still attempting to overcome a loss of shareholder trust from early December. With no major partner as of yet, and a similar share-based dilution problem as with Aurora and Canopy, meaningful per-share profits could be a ways off.
Long story short, you should probably temper your expectations for the industry.
