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

Here’s why Aurora Cannabis (TSX:ACB) (NYSE:ACB) is prepared to deal with a supply glut in the Canadian marijuana market.

| More on:
edit Cannabis leaves of a plant on a dark background

Image source: Getty Images

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Cannabis Stocks

Upwards momentum
Energy Stocks

3 Canadian Stocks That Could be Huge Winners in the Next Decade and Beyond

Stocks like Canopy Growth, Blackberry, and Ballard Power are leading and redefining new multi-billion dollar industries.

Read more »

A cannabis plant grows.
Cannabis Stocks

Should You Invest in Canadian Cannabis Stocks Like Canopy Growth in September?

Canadian cannabis stocks, including Canopy Growth, remain high-risk bets for investors, despite trading 94% below all-time highs.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

ACB Stock: What’s Behind Aurora Cannabis’ Recent Surge?

More countries are legalizing marijuana. Should you buy ACB stock?

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Cannabis Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

Long-term investors can consider buying shares of Dollarama and Curaleaf to generate market-beating gains in the next two decades.

Read more »

A cannabis plant grows.
Cannabis Stocks

Is Now the Time to Buy Cannabis Stocks?

These cannabis stocks are up 70% and 19% this month! Should Canadian investors hop on board?

Read more »

A cannabis plant grows.
Cannabis Stocks

Why I’m Considering Canopy Growth Stock For My RRSP

As the cannabis industry grows, adding Canopy Growth stock to my RRSP will give me access to massive upside.

Read more »

A person holds a small glass jar of marijuana.
Cannabis Stocks

Canopy Growth Stock Jumps 20%: Here’s What Happened

Canopy Growth stock (TSX:WEED)(NASDAQ:CGC) popped 20% on Monday from an announcement made by another cannabis producer.

Read more »

Retirement plan
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Companies such as Brookfield Asset Management have the potential to consistently beat the broader markets and deliver stellar returns to…

Read more »