Since the beginning of 2019, few industries have generated buzz quite like the marijuana industry. The Horizons Marijuana Life Sciences ETF, the first tradable cannabis exchange-traded fund, is up 49% for the year through Monday, May 6. That almost triples the 17% return of the broad-based S&P 500 since the year began.
Becoming enamored with the pot industry is easy when Wall Street continues to throw around huge sales projections. Although the weed industry “only” generated $12.2 billion in legal global sales in 2018, it looks to be on pace for $50 billion to $75 billion in annual revenue by the end of the next decade. Meanwhile, Christopher Carey at Bank of America recently opined that peak pot sales could hit $166 billion a year, as well as disrupt industries that currently total $2.6 trillion in annual worldwide revenue.
And you wonder why marijuana stocks have done so well?
Pot stock investors flock to Aurora Cannabis
Perhaps no pot stock is more popular than Alberta-based Aurora Cannabis (NYSE:ACB), which is the crowned favorite among millennial investors. Aurora Cannabis brings a number of competitive advantages to the table that’s made it a common selection among investing enthusiasts. For starters, it’s expected to lead its peers in terms of peak production potential. The company currently calls for more than 625,000 kilos of peak annual output by the midpoint of 2020, but I find this projection to be conservative. Inclusive of its ICC Labs acquisition in South America, well over 700,000 kilos seems likely.
In addition to simply producing a lot of marijuana, Aurora has done a killer job of moving into international markets via production and/or distribution deals. Including Canada, Aurora has a presence in 24 countries, which leaves even well-established players like Canopy Growth and Aphria well in the distance. These overseas sales channels will come in particularly handy if and when dried cannabis flower becomes oversupplied and commoditized in Canada. Should this happen, Aurora will have numerous overseas sales channels to reduce or eliminate any domestic excess supply, removing the possibility of serious margin degradation.
Also, don’t forget that Aurora’s “secret weapon” is that it’s chosen to focus on the medical marijuana market, as opposed to the much larger recreational consumer pool. Although this means giving up on some low-hanging fruit, the decision should lead to higher and more consistent margins. That’s because medical pot patients use marijuana more frequently, buy product more often, and are considerably likelier to purchase high-margin derivatives, such as oils, than adult-use consumers.
Add this up, and couple it with the growing likelihood that Aurora Cannabis will find a brand-name partner now that it’s hired billionaire activist investor Nelson Peltz as a strategic advisor, and it’s easy to see why investors have rallied around Aurora.