Cannabis Corner: Will Big Weed Run Out of Cash?

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

As Canadian dispensaries stock their shelves with infused snacks and beverages, the big cultivators finally have space to differentiate themselves and their products. The coming quarter should be a revelation.

For now, however, a lot of investors still treat all the major cannabis stocks as interchangeable cogs in the big green machine. In the old “Canada 1.0” regulatory environment, that wasn’t far from reality.

After all, one ounce of dried plant looks just like all the others, no matter who grew it. And price controls ensure that nobody gets any brand power. It’s all commodity economics.

And when commodity economics rule, it’s all about scale and money. That’s why the question around Big Cannabis still largely revolves around whether these companies will grow to a profitable scale before they run out of money.

On those terms, the stocks are very, very different. All of them have plenty of cash to keep them afloat for what could be years before the businesses grow to the point where they break even.

But some companies have more wiggle room to cope with setbacks and delays. Tilray Inc. (NASDAQ:TLRY), for example, is widely cited as facing insolvency if it can’t flip to profitability by mid-2021.

I agree that weighing any growth curve against a dwindling pool of cash is always a risky venture. If growth hits a wall or the burn rate accelerates, you’re in trouble.

However, Tilray is currently on track to spend $130 million more than it will take in over the next 18-20 months. This is only staggering until you remember that there’s $220 million in the bank and another $147 million in tangible assets on the balance sheet.

During that time frame I expect sales to at least double. By that point, the company will be generating $40 million a quarter and all management needs to do is to maintain its established market share.

Of course, 18-20 months is a long time for some investors to wait on what is still an unproven proposition. And Tilray is also carrying $430 million in debt, so it’s not my first choice in terms of sustainability.

Aurora Cannabis Inc. (NYSE:ACB) is a little better. The math is similar, with $315 million in cash stacked against what could be at least $255 million in future capital drain.

Like Tilray, Aurora is carrying significant debt. But those loans are secured by bigger tangible assets like land, greenhouses and a full $165 million in unsold inventory. Barring absolute disaster, Aurora is built for the long haul.

Then there’s Canopy Growth Corp. (NYSE:CGC), which is sitting on a staggering $4.5 billion in cash, $1.1 billion in assets, $340 million in inventory and another $475 million in strategic investments in other companies.

Even after subtracting the debt, Canopy is barely trading at 2X book value. While it’s going to need to spend at least $900 million growing to a profitable size, there’s more than enough money here to make that happen.

One way or another, Canopy is going to be around for years to come. If you’re looking for the most “mature” player in the group, this is it.

Or you can always go with the company that’s already generating profit without needing to burn cash. That’s Aphria Inc.(NYSE:APHA), a key component of my Turbo Trader Marijuana Millionaire Portfolio.

It’s there for a reason. I’d rather capture strength first and then move up the risk curve after that. Even so, there’s significantly risk in the group than people suggest.

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