Why Organigram (TSX:OGI) Stock Gained 44% Overnight

Organigram stock spiraled upwards after its stellar fiscal first-quarter 2020 results yesterday. Are macro conditions improving for pot stocks?

| More on:
Marijuana plant and cannabis oil bottles isolated

Image source: Getty Images

Shares of Canada-based cannabis company Organigram Holdings (TSX:OGI)(NASDAQ:OGI) rose by a staggering 44% on January 15, 2020. The company announced its fiscal first quarter of 2020 (ended in November) results on January 14 after the market close.

It reported net revenue of $25.2 million, a year-over-year growth of 103% compared to net revenue of $12.4 million in the prior-year period. Analysts expected the firm to post sales of $18.96 million in the November quarter.

OGI’s stellar performance also pushed peer cannabis stocks higher yesterday. Shares of Charlotte Web Holdings, Hexo, Aurora Cannabis, and The Green Organic Dutchman gained 17.3%, 15.9%, 15.5%, and 8.2%, respectively, on January 15.

Key highlights in Q1

In the first quarter, OGI’s cost of cultivation fell from $0.87 per gram to $0.61 per gram. Selling, general, and administrative expenses accounted for 37% of net revenue, marginally higher than the 36% in the prior-year period. OGI returned to positive EBITDA, which stood at $4.9 million, or 19% of sales.

OGI shipped the Trailblazer Torch vape cartridges in December 2019 to take advantage of Cannabis 2.0. At the end of the November quarter, OGI had a cash balance of $34.1 million, which is enough to fund its operations and capital-expenditure plans.

While OGI’s net revenue more than doubled in Q1, its gross profits rose just 6% on an absolute basis. The company attributed this decline in gross margin to a higher cost of sales from “increased staffing for cultivation and post-harvest capacity.” OGI could not benefit from economies of scale, as consumer demand was sluggish due to the slow rollout of retail stores in Canada.

The gross margin was also driven lower, as Organigram reported a net non-cash fair-value gain on biological assets and inventories sold of $42.9 million in the first quarter of fiscal 2019. This figure stood at $1.9 million in the November quarter.

What next for OGI and investors?

Despite concerns over vaping products, OGI and peers are investing heavily in product development. The company is initially focusing on the two largest segments based on the United States sales data for Cannabis 2.0.

According to this data, vape pens and edibles (including beverages) account for 23% and 13%, respectively, of the total recreational cannabis market. OGI will start shipping two more vape products in the next six months.

It’s product portfolio also includes high-quality cannabis-infused chocolate and a dissolvable powder product aimed at the edibles market. These products will be launched by the end of the second quarter of the calendar 2020.

Last month, Organigram received approval for its remaining 16 grow rooms, which will increase the company’s production capacity to 89,000 kgs per year, up from 76,000 kgs per year.

Due to lower-than-expected consumer demand over the last year, OGI has delayed the completion of Phase 4C, which is the final stage of its Phase 4 expansion. This facility was set to be completed by the end of December 2019 and Organigram has confirmed that it would prioritize cash flow for other opportunities.

However, Organigram is optimistic that the expansion of retail stores in Canada’s major provinces such as Ontario and Quebec will help the firm grow revenue over the next few years. These two provinces account for 60% of the country’s population.

Organigram stock is still trading 64% below its 52-week high, despite the impressive gain yesterday. How long can OGI and other pot stocks sustain this rally? A lot will depend on how giants Aurora Cannabis and Canopy Growth perform in their respective fiscal quarters.

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.

The Motley Fool owns shares of and recommends Charlottes Web Holdings. The Motley Fool recommends HEXO., HEXO., OrganiGram Holdings, and OrganiGram Holdings. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

More on Cannabis Stocks

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

A close up image of Canadian $20 Dollar bills
Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Why This Little-Known Cannabis Stock Could Double in 2024

This cannabis stock has already doubled this year since 52-week lows and could easily rise that much once more.

Read more »

Bad apple with good apples
Cannabis Stocks

1 TSX Stock I Wouldn’t Touch With a 420-Foot Pole

Down 87% from all-time highs, Cronos Group stock is a still a high-risk investment for long-term shareholders in 2024.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth: Buy, Sell, or Hold?

Canopy Growth (TSX:WEED) stock should make a killing on U.S. expansion, but investors will need to be very patient.

Read more »

Marijuana plant and cannabis oil bottles isolated
Energy Stocks

3 Canadian Value Stocks to Buy Right Now

Undervalued Canadian stocks such as Secure Energy should be part of your shopping list in May 2024.

Read more »