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Why Aurora Cannabis (TSX:ACB) Doesn’t Fear a Supply Glut

For cannabis investors, Aurora Cannabis (TSX:ACB)(NYSE:ACB) needs no introduction. The Edmonton-based pot grower is easily one of the most popular cannabis companies in North America, particularly among Millennials. However, this popularity has yet to translate into meaningful gains on equity markets. This shouldn’t be a cause for concern, however, as the marijuana sector is still in its early stages.

Aurora’s Vice president of investor relations seeks to correct misinformation

Recently, at a virtual investor conference, Aurora’s Vice president of investor relations — Marc Lakmaaker — addressed some common myths about the cannabis market. Arguably the most widespread of these is the claim that the Canadian market in running the risk of being oversupplied. Notably, most pot firms have been investing small fortunes to increase their production capacity, which is widely considered the first step in the quest to conquer the market.

The logic behind this strategy is obvious; namely, that you can’t sell a product you don’t have. In order to meet the rising demand generated by the legalization of recreational pot in Canada and an increasing worldwide acceptance of cannabis-related products, cannabis companies saw it fit to focus on increasing their ability to supply the market with enough of their products.

Aurora Cannabis has been the most successful in this regard. The firm is projected to be the leader in the sector in terms of production capacity once all is said and done, with an estimated capacity of around 700,000 kilograms per year. Next in line would be none other than Aurora’s main rival, Canopy Growth Corp (TSX:WEED)(NYSE:CGC), with an estimated production capacity of around 550,000 kilograms per year.

No other pot company in Canada is projected to have even half of what Aurora’s peak production capacity will be, but there are plenty more that will break the 100,000 kilograms per year by barrier. However, the flip side is that this may lead to a supply glut, which will drive down the price of marijuana along with these companies’ margins. But Marc Lakmaaker isn’t buying it (yet), and is also adamant about the fact that the cannabis market is far larger than just Canada.

Why does this matter?

Marc Lakmaaker comments about the cannabis market being far larger than just Canada are important. Even if the Canadian market ends up being oversupplied, Aurora has built arguably the strongest international presence among its peers. The firm operates in about 24 countries, including Germany (where Lakmaaker claims Aurora holds a 40% share in Cannabis flower), the largest cannabis market outside North America. Further, the firm’s focus is in the medical market, which presents higher margins and is less likely to suffer from a supply glut.

The bottom line

Whether the comments Lakmaaker made were as a means to appeal to investors, he conveyed essential information all those interested in the cannabis market should consider, especially those looking to benefit from it long-term. The danger of the market being oversupplied might not have arrived yet, according to him, but it likely will within the next few years. It’s important to observe how each pot company is preparing for it. Aurora Cannabis seems to have made sure a supply glut will not have a significant negative impact on its top line.

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Fool contributor Prosper Bakiny has no position in any of the stocks mentioned.

 

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