Marijuana stocks might represent a once-in-a-lifetime investing opportunity. This emerging market, after all, is projected to grow its annual sales by over 35% per year for the next five years in a row. What’s even more impressive is that some key industry insiders believe that red-hot growth pace may last for upwards of a decade or more — resulting in a market with sales in excess of $500 billion per year.
Which marijuana stocks are best positioned to take advantage of this rapidly rising tide? While a solid argument can be made that some of the smaller entities might represent the best overall values, the largest producers of cannabis are clearly the safest ways to invest in this risky space. Cowen analyst Vivien Azer, for example, recently pegged Aurora Cannabis (NYSE:ACB) as the firm’s top cannabis pick because of its industry-leading 575,000 kilogram peak annual cultivation capacity…
The case for Aurora
Before diving into the details of any specific cannabis-oriented company, it’s important to understand the dynamics of this rapidly maturing space. The Cliff’s Notes version of the story is that most marijuana companies are likely to fold within the next two years: The Canadian medical and recreational markets are expected to be grossly oversupplied soon, a situation that will lead to brutally low gross profit margins within some of the most popular product categories like dried flowers.
In that harsh economic environment, peak production capacity will be critical to a cannabis company’s ability to survive and develop a viable competitive moat — for three core reasons:
- Large operations come with economies of scale that reduce all-in production costs. As gross profit margins shrink across the industry, cost control will thus be a major competitive advantage.
- Companies with top-shelf production outputs can expand more quickly and broadly into derivative cannabis markets, as well as international markets.
- Growing large amounts of cannabis, across numerous independently operated facilities, lowers the risks associated with singular crop failures or poor quality control at individual grow sites.