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Can Canadian Marijuana Companies Meet the Potentially Explosive Post-Legalization Demand?

Although the hype has worn off when it comes to Canadian marijuana stocks, major growth prospects still exist in this newly emerging industry. Triple-digit percentage growth is the norm, and companies such as Aphria Inc. (TSX:APH) have set the bar really high. Aphria’s latest quarter was deemed as “an industry record” by one analyst when referring to the company’s low per-gram production cost improvements.

Nationwide legalization is approaching, and many pundits believe that recreational demand for the drug will be gigantic. There’s a huge cloud of uncertainty as to when legalization day will arrive and what will happen once this day comes, but many analysts agree that recreational demand may be off the charts.

Although legalization was originally slated for summer 2018, many of Canada’s premiers have been pushing for further delays, which could see the legalization date pushed back by a year, give or take a few months. This could mean more volatile times ahead for Canada’s top marijuana producers in the near term.

Let’s focus on what will happen once the much-anticipated legalization date actually arrives. Could pot stocks deliver huge returns if the demand really is as high as pundits are forecasting?

Marijuana producers may not be able to keep up with demand following legalization

Cam Battley, vice president of Aurora Cannabis Inc. (TSX:ACB), believes it’s unlikely that Canadian marijuana producers will be able to meet the explosive demand of consumers. Mr. Battley encouraged all producers to increase their production, so the supply will not be overwhelmed by the demand.

Mr. Battley stated, “Right now, the existing capacity and what is already envisioned will not be sufficient to meet the needs of the adult consumer market … [Aurora] need[s] to expand our capacity right away simply to meet the demands of the rapidly growing medical cannabis system … When the demand of the adult consumer system is layered on top of that, it’s a rush to build as much capacity as possible.”

Aurora has been working on one of the most ambitious projects in the marijuana scene right now with its 800,000-square-foot Aurora Sky facility, which will be rolled out in phases and will be capable of producing around 100,000 kilograms of dried marijuana per year.

That’s the equivalent of around 313,000,000 joints!

It’s clear that the management team at Aurora knows that the demand will be ridiculously high, but will Canada’s current licensed producers be able to keep up with the demand? How many people would be willing to use marijuana if it became legal? Would pushing back the legalization date help producers meet potential demand?

These are questions that we can only speculate on right now, but I find it very likely that a stronger-than-expected demand will cause a major rally in the stocks of the companies that are best prepared to meet such sky-high demands. Aurora and Aphria are two names that I believe may be the biggest winners once the elusive legalization day arrives.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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