Trade in Canopy Growth Corp. (TSX: WEED) stock had to be halted some minutes on the TSX on April 13, as the marijuana giant released the material news that it had tripled its licensed productive space this year to more than 2.4 million square feet, but the company did not make any mention of its productive capacity in dried cannabis grams per annum.
Unlike most other licensed producers that tout this number loudly at every opportunity, Canopy has chosen to keep mum on this potentially stock-moving figure.
Aurora Cannabis Inc. (TSX: ACB), in comparison, doesn’t forget to mention productive capacity and has even made the number a first highlight during the May 14 announcement of its takeover of MedReleaf Corp. (TSX:LEAF), where it boasted of an “industry-leading scale” total funded capacity of over 570,000 kilograms per year of high-quality cannabis.
Aphria Inc. (TSX:APH) expects to have over 230,000 kilograms per annum productive capacity by year-end.
Canopy’s licensed growing space remains on path to exceed a staggering 5.6 million square feet of domestic growing space, and that’s a huge number by any measure.
Increased production capacity represents a material change in marijuana business operations, so why would a leading player decide to keep silent on the interesting number in hard grams?
There are some good reasons to consider.
Firstly, productive capacity estimates are just that: nameplate estimates. They may not be realized, or the facilities may be optimized to surpass nameplate capacity by wide margins. Consider the case for MedReleaf, which managed to optimize its 55,000-square-foot Markham indoor grow facility capacity from 4,000 to 7,000 kilograms of dried cannabis per annum.
Aurora did not manage to reach its estimated annual capacity at its Aurora Mountain indoor grow facility last year when the facility reached maximum production.
Further, high nameplate productive capacities, without matching vibrant client portfolios, may quickly become irrelevant for valuation if the output fails to reach the final consumer. In this regard, producers may never fully utilize the capacity; they may scale production up or down depending on demand-and-supply outlook, management confidence, and strategic up-take agreements. Valuing marijuana entities on their capacities may be misleading, even though the whole industry may still be too young for most alternative valuation metrics to be applicable yet.
Most noteworthy, marijuana productive capacity estimates, as they are reported right now, may be very aggressive and the timelines to facility completion too optimistic, rendering much talk on productive capacity more a speculative undertaking than an objective valuation assessment.
Investor takeaway
Canopy intentionally avoids making public the productive capacities for its numerous grow facilities, and there could be some integrity to this “inaction.”
The market leader’s pole position in the emerging sector is under severe threat from a younger, but aggressively growing Aurora. It has to continue executing for growth, as the younger, aggressive competitor is ferociously gunning for its cannabis pie.
It is important that investors be mindful of distribution channel growth as distribution drives revenue, while productive capacity alone does not. A case in point is that Aurora has been selling more cannabis in Germany than Canopy, despite having just 4,800 kilograms per annum, E.U. GMP-certified productive capacity, thanks to its stronger distribution arrangements in the territory over last year.
Canopy’s wider and growing sales channels globally, and its strong local market clout, could remain an envy for many in the industry, generating sustainable long-term growth, more so in a Canadian recreational cannabis era, where current inventory and market readiness could define actual market share post legalization.
Canopy leads on inventory.
