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Invest4Life2016on Dec 26, 2016 10:19pm
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Investing in Canadian MMJ Stocks is a No Brainer!
Investing in Canadian MMJ Stocks is a No Brainer!
It's plain to see that MMJ plays have the licence to print money. There’s no risk for the top MMJ plays as they'll sell out of product so fast it'll make their heads spin. In these next few months it's going to get crazy as the larger market cap companies pursue takeovers and mergers to gain additional market share. With only 35 companies to choose from the biggest problem they'll face is trying to supply the demand. In other words dispensaries and the underground market will be alive and well for years to come till the mmj plays can feed the market themselves.
A constant that would be the most consistent in evaluating the variables in the cannabis market would be the consumption of cannabis per user since it's based on an average. Since this a new industry it's difficult to predict the numbers as studies seem to have underestimated the percentage of cannabis users and the average amount of cannabis a user consumes.
One example are numbers from the University of Colorado's study to gauge Colorado's recreational marijuana industry:
- Estimate that 12.5% of population use cannabis = 642 772 people
- Estimate 3.5oz/year per cannabis user = 2.25 million oz of cannabis/year or 64 320 kg
- 2.25 million oz X $200/oz = $450 million/yr
Now that Colorado has 3 years of recreational legalization under their belt there's some real numbers out. Using the number of cannabis users from the University of Colorado’s study :
- Cannabis sales for Colorado in 2016 = $1.2 billion
- $1.2 billion divided by $200/oz = 6 million oz/year or 193 548 kg
- 6 million oz/year divided by 642 722 cannabis users = 9.3 oz/cannabis user
I very much doubt the average user consumes 9.3 oz/person per year so let's use the University of Colorado's 3.5oz/year per person estimate instead:
- 6 million oz divided by 3.5oz/year = 1.7 million cannabis users
- 1.7 million users = 34% of Colorado's population
34% of the population is way too high and the oz/year per person is too low, I think the numbers are around 21% of Colorado's population consuming 6oz/year per person :
- 21% population of Colorado = 1 million cannabis users
- 1 million users X 6oz/year = 6 million oz of cannabis/year or 193 548 kg
- 6 million oz/year X $200/oz = $1.2 Billion
21% using 6oz/year jives with the $1.2 billion in cannabis sales in Colorado for 2016. To further figure out if the amount of 6 oz consumed/person is realistic I looked at our top Canadian MMJ companies to see if they had any numbers. The only company that provides a cannabis user consumption is Mettrum - their number is an average of .51 gram/day, which equals to 6.6 oz/year.
Mettrum financial statement for the first quarter of this year :
- Sold 10 926 oz of cannabis for $2.71 million for an average of $248/oz
- 10 926 oz divided by 6700 patients = 1.63 oz/3months = 6.52 oz/year per person
Using ounces sold divided by MMJ patients pretty much jives with Mettrum's average cannabis consumption per year claim. Using the same method above because the others don't have an average cannabis consumption per patient info, I'll use their 1/4 financial statements with their MMJ patient count and the amount of marijuana sold.
CGC last quarter:
- Sold 36 239 oz of cannabis for $8.5 million for an average of $234/oz
- 36 239 oz divided by 24 400 patients = 1.48oz/person per 3 months = 5.92oz/year
Organigram reported their financial statement based on 12 months:
- Sold 23 613 oz of cannabis for $6 127 623 equaling an average of $260/oz
- 4000 patients divided by 23 613 oz = 5.9oz/person per year
I believe an average of 6 oz of cannabis/patient per year is a realistic number to use as a constant in figuring out the other relevant numbers for the Canadian cannabis market.
Before looking into the much bigger recreational market numbers, lets take a look at some MMJ market numbers. Health Canada estimated that by 2024 Canada will have ~ 450 000 MMJ patients. It's hard to predict the future but looking at the current numbers and average growth per quarter of 49% since September 2015, it’s not difficult to conceive that 450 000 MMJ patients will be reached by 2019 and that's being very conservative!
- September 2015 = 30 000 MMJ patients
- January 2016 = 43 342 MMJ patients = 44% increase
- May 2016 = 67 075 MMJ patients = 54% increase
- September 2016 = 100 000 MMJ patients = 49% increase
- September 2015 - September 2016 = 233% increase
100 000 MMJ patients as of Sept 2016 makes it a market worth $144 million
- 100 000 MMJ patients @ 6oz/year = 600 000oz/year or 19 354kg
- 600 000 oz/year X $240/oz = $144 million/year
450 000 MMJ patients market
- 450 000 MMJ patients @6oz/year = 2.7 million oz/year or 87 096 kg/year
- 2.7 million oz X $240/oz = $648 million/year
A $650 million/year Canadian MMJ industry is pretty decent. The top 5 MMJ companies will have enough production capacity to meet that demand by 2018 now throw in recreational into the mix and all of a sudden it's Houston we have a big problem!
To be conservative I'll use 12.5% of Canada's population to determine the recreational market.
- 12.5% of 35 million = 4.2 million cannabis users
- 4.2 million users X 6oz/year = 25.2 million oz/year or 812 903kg/year
- 25.2 million oz X $240/oz = $6 billion in revenue/year
Right now the top 6 MMJ companies with their current production facilities will be able to reach full combined production of 190 000kg/year by mid-2018. To fill the rest of the demand of 622 903kg, the other 29 MMJ plays would each have to produce 21 500kg/year. Not impossible but very unlikely they will be able to before 2019.
The number that really stands out is the production needed for 12.5% of the population.
It only makes sense that Canada will still need dispensaries for quite some time, because there's no way MMJ companies will produce enough product to meet the demand and if the the dispensaries are shut down it will drive much of the demand back underground.
Anyway you look at it the MMJ companies can't loose as the pie is a massive one. In fact the top MMJ companies will continue to scramble for additional growing space over the next few years since they'll only be able to produce enough cannabis to each supply approx 120 000 cannabis users per year by mid-2018 with what they have right now.
Numbers for 21% of Canada's population :
- 21% of Canada's population = 7.35 million cannabis users
- 7.35 million users @ 6oz/year = 44 million oz/year or 1.4 million kg/year
- 44 million oz/ year X $240/oz = $10.5 billion/year
It's no wonder investors are piling into the MMJ plays for all they have to do is grow cannabis, expand production, and sell to a massive market forever. Startup stocks failure rate across most industries is approx 90%. 42% of failures was due to making products that nobody wanted.
- The junior resource explorers are risky considering 1 in 10 actually find a worthy deposit.
- The biotech startups failure rate is 91% at an average time span of 3 years.
- The tech startups failure rate is 90% and can milk shareholders for years.
Marijuana stocks are a no brainer compared to all other startup stocks since a massive demand for cannabis products already exists and on the fact that the product can be easily produced. The only way they can fail is to have huge crops go bust and by being missmanaged. My no brainer MMJ play is EMC because their business model is very efficient compared to some of the earlier plays who didn't seriously factor in the recreational market into their business plan till Trudeau got in. A good example of this is CGC with their average sale price of $234 per oz - the lowest in the business! EMC's target for mid-2018 is 21 000 kg/year with sales averaging $270 an oz - that's some pretty sweet margins! It will be very interesting to see these companies' average sale price per ounce come 2018.
Do your own DD