The market has constantly ignored the flood of supply coming into the cannabis industry despite my constant alarm bells. While Aurora Cannabis (ACB) is focused on flooding the market with new supply, the stock market is in the process of being flooded with new shares. The combined supply additions are a big reason that the stock isn't rising anymore.
To start the week, Aurora Cannabis announced the approval of new production facilities from Health Canada. The Aurora Sky and MedReleaf Bradford facilities will add 128,000 kg of new cannabis supply each year.
The news isn't exactly new considering the company has already promised to go from increasing supply from 7,822 kg in the December quarter to reaching 25,000 kg of supply available for sale by the June quarter.
This news adds 32,000 kg of quarterly supply. A lot of confusion exists on exactly when all of this additional supply will flood a market that never lacked for weed.
Aurora Cannabis has this list of facilities hitting production by 2020. Based on the details, these facilities are a major contributor to the 25,000 kg used for the June quarter estimate placing a target of ~40,000 kg of quarterly supply a the time.
Remember that the two largest operators in Canada which includes Canopy Growth (CGC) only produced about 7K kg each in the December quarter and average selling prices plunged. Aurora Cannabis is on a path to bring on nearly 5x the quarterly supply by June.
The other key facilities are as follows:
An important aspect of the story is that investors continue to hear the global market projections in the $200 billion range. Aurora Cannabis uses this slide for a market prediction of ~$22 billion for Canada alone.
The market, though, is vastly smaller now and dominated by the U.S. where Aurora Cannabis doesn't participate. According to estimates by Arcview Market Research, the legal cannabis market outside the U.S. was only expected to reach $3.7 billion in 2019 and $5.1 billion in 2020. The new estimates have the market target down from $18.1 billion in 2019 to only $16.9 billion now.
The global markets are far swamped by the U.S. that was expected to reach $14.4 billion this year. While the Canadian market obtains a lot of market focus due to the large corporations trading on major stock exchanges, the highly fragmented U.S. market doesn't lack for an army of smaller companies that will expand rapidly as the U.S. legalizes marijuana state by state.
These global market numbers killed the thesis that the Canadian giants will somehow swoop into a future federally legalized market in the U.S. and take market share without a substantial spend. In addition, Aurora Cannabis is about to flood the domestic Canadian market as new facilities hit the market in June.
While the market generally ignores the oncoming flood of cannabis product, the market is completely ignoring the flood of shares in cannabis stocks. Most of the major Canadian players are already listed on the NYSE and have dramatically increased their share counts in the last few years. Aurora Cannabis, Canopy Growth, Aphria (APHA), Cronos Group (CRON) and Tilray (TLRY) have all generally made numerous acquisitions via shares or accepted large investments for ownership positions.
Aurora Cannabis alone has flooded the market with a share count that now officially tops 1 billion. At some point in the future, large amounts of shares from these acquired companies will come onto the markets following standard lock-up periods. These shares could easily flood the market and eat away at market demand for shares.
In addition, the biggest issue could be a flood of uplistings to the NYSE and NASDAQ. Right now, American firms can't list on the major domestic exchanges due to having operations deemed illegal by the federal government. In the future, a long list of American companies will desire to list on the major exchanges to increase liquidity and market credibility.
For now though, a list of Canadian operators are on the move to the U.S. exchanges on top of the above stocks. These shares have likely attracted investors away from the major players.
CannTrust (CNTTF) - listed on the NYSE on February 25. The stock has a market value of $1.0 billion.
Hexo (HEXO) - listed on the NYSE on January 23. The stock has a market value of $1.2 billion.
Village Farms (VFF) - listed on the NASDAQ on February 21. The stock has a market cap of $511 million.
These three stocks alone add $2.7 billion in stock value, yet the target market size is only around $3.7 billion this year. The companies are all minor players in the cannabis sector with the highest ranking in the group among the top 10 Canadian producers at #9 for Hexo. This list doesn't even include that Zenabis plans to surpass all three of these uplisting stocks combined with a target of 500,000 kg/per year.
The key investor takeaway is that Aurora Cannabis and the Canadian sector is in the process of flooding the cannabis market with both new production capacity and a ton of new shares. The stock has failed to top $8 due to these new floods of supply while the target markets aren't nearly as large as the market pretends.
Avoid the stock until the flood of new supply where production or additional shares disappears.
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