Last week was a pivotal moment for the cannabis industry. On October 17, one minute after midnight, the first legal recreational cannabis sale was recorded–marking the beginning of the era of legal cannabis. That night, Canopy Growth Corp (TSX:WEED(NYSE:CGC) CEO Bruce Linton said, “When’s the last time you bought a gram and got a receipt for it? Never happened.” But what “never happened” in the past quickly became routine, as cannabis stores sold out and had to turn away customers at the door.
For customers, this news was regrettable, to say the least. But for Canopy and its investors, it may prove to be just the shot in the arm the company needs ahead of its next earnings report. In this article I’ll take a look at how last week’s cannabis legalization played out and what it means for Canopy shareholders.
Supply shortages
The big story of last week was actually foreseen ahead of time. A few days before Wednesday, Aphria Inc (TSX:APH) CEO Vic Neufeld warned customers to expect pot shortages, saying that demand exceeded supply. He turned out to be right. After just two days of legalization, “sold out” signs were appearing on cannabis stores in St. John’s, Newfoundland– the first city to register a legal pot sale.
Supply shortages are bad for Canopy in certain respects. They mean that the company will have to ramp up production to meet demand, which could mean even more costly infrastructure investments.
They may also send customers running to black market dealers to get product they can’t find in-store. On the whole, though, these shortages are evidence of high demand, which can only mean increased sales and higher revenue growth in the short term.
High demand
In cities from St. John’s to Edmonton, the strong demand for cannabis could be seen clearly in the streets: customers formed hours-long lineups to get their first gram or two of legal pot. Edmonton cannabis store owner James Burns noted that staff were working full speed ahead from 10 a.m. to 10 p.m. to serve customers. These are both signs of very high demand.
And demand did not settle down as the week wore on: by Sunday, many stores were still sold out, and customers were still lining up with the hopes of scoring a gram, pre-rolled joint or bottle of cannabis oil.
Possible outcomes
There are several ways that legalization could play out for Canopy, some good and some bad. In the best case scenario, demand stays strong, the company ups production without having to make too many costly investments, and the price of pot stays high. In this scenario, the company will see significant revenue growth and possibly even positive earnings.
In the worst case scenario, Canopy has to invest in new infrastructure in order to meet short-term demand, driving costs up, while supply catches up with demand in the long term, driving prices down. In this case, Canopy may continue to see costs outpace revenue, as it did in its most recent quarter.
Ultimately, reality will probably play out somewhere in between these two extremes. One thing is certain, however: investors can expect serious top-line revenue growth for Canopy in its next income statement.
