Transcript
James West: Mark Noble is back, Senior Vice-President of ETF Strategy for Horizon ETFs Management Canada. Mark, welcome back.
Mark Noble: Great to be here.
James West: Mark, Canopy Growth reporting earnings; big, fat $1.18 billion loss there due to expiration of warrants or loss of warrants. Still a big loss for a company, and pretty much defining of the sector, which has clearly changed its expectations from the days of speculation. What’s your take on that?
Mark Noble: Right. Well, I mean, Canopy is the one we usually look for looking at the broad sector. Our ETF is sector-based, so we want to, you know, get a sense of the sector in Canada, and Canopy is the big dog. The issue with Canopy is that it missed its earnings estimate. So most analysts had its revenue at around 120, and it declined to about 90, I believe, from the 90 range. So not only is it running at a loss, which has been expected, but it’s also not meeting revenue expectations.
And you know, so then, the stock is down 12 percent. And I think this is really interesting for investors and guys listening to the show right now, is I think we’re being given an opportunity. This is going to sound a little contrarian, but we’re being given an opportunity, maybe, to look at scaling in to some of these higher quality marijuana companies, because what’s happened over the last sort of three to four months is, the rules of engagement in terms of how people are valuing the stocks has really changed.
So we’ve seen a broader macroeconomic concern around the stocks. Well, if Canopy had delivered these results in Q1, their stock would be up. But it’s down today because people are starting to look at earnings, they’re starting to look at profitability, which isn’t really fair for these stocks, because overall, some of these companies, particularly Canopy and Aurora, they’re spending, you know, $2 for every $1 that they bring in in foreign direct investment, looking to grow their footprint outside of Canada – which is exactly what you want these companies to be doing, because Canada is a rounding error when we look at the global marijuana industry.
And so, having that footprint there is crucial, and now they’re being punished for not generating earnings and growth. So Organigram and Aphria get a big kick up because they’re generating a profit on Canadian revenues, while these other companies, which have maybe over-capitalized a bit, extended a bit, but doing so to move outside of Canada.
So I just find that very perplexing, and I think probably what we see is, maybe we look back at this three or four months from now as kind of an interesting entry point for these companies that are capitalizing for future growth.
James West: So, how has that change in the expectation of investors affected the performance of your ETF?
Mark Noble: Well, the ETF itself is still up about 12 percent on the year, but the whole sector – everybody, whether it’s Aphria, Aurora, or Tilray – everybody’s down about 30 percent plus over the last three months. So the whole sector has declined. Now, number one reason for that is, they’re equities. You’re having a broad equity selloff. But Number Two, there has been a big movement. As people get concerned about the equity market, they shift how they look at the stocks. So people are starting now to fundamentally value these stocks.
Well, if I fundamentally value marijuana stocks, you shouldn’t own a single marijuana stock, because that is not what we’re trying to do. The market cap of the Canadian market sector is $55 billion, give or take; maybe $50 million today, at this selloff. The gross net market of Canada for rec sales, at a maximum, is like $5.5 billion. So I’m already 10 times what the opportunity in Canada is.
But these companies are only generating revenue from Canada, and they’re only generating revenue from Canada in a rollout that hasn’t even fully encapsulated itself. So great, you’re turning a profit, Aphria or Organigram, and I have nothing against these stocks; it’s just that you’re turning it off when half the market segment is looking for edibles and vapes – really, they are – and that’s not even available till October. And it’s also a small market. I mean, if I look at the US market, for example, the US market right now is going to generate about $10.5 billion. So the US market is going to be, already this year, twice – this is just total sales from all the state levels – is going to be twice the size of the Canadian total market.
But it’s segmented and hard to access because of their securities system. The CBD market alone in the US is probably going to be about $700 million, and will probably outsell all recreational cannabis sales in Canada. So the growth for this business, you know, folks, it’s on the other side of the border.
And so this is why you’re looking at companies like Canopy and Aurora. What they’ve been doing is taking all the money coming in from the capital markets side, and putting it back into investments, because that’s where the growth is, right? If I’m in bev and I’m Anheuser-Busch, you know, and my Number One selling brand is Budweiser in Canada, which it is, it’s still a rounding error on my balance sheet. What I want is the $40 billion of rec sales that is coming in on the US side.
So this becomes a very interesting play where you now have a 30, 40 percent selloff in this sector, and I would say long-term, the US market is only ramping up, and we know legalization could be around the corner, and we could see this second wind coming.
James West: So that’s interesting. You used the term over-capitalization, and so, from what you’re saying, basically, the fact that Canopy has taken this massive loss as a percentage of its available capital, and given what it’s using the capital for, this is actually a symptom of a very healthy company in an exploding sector.
Mark Noble: Yeah, I mean, look: with you, too, again, if you’re trying to take a Warren Buffett, you know, balance sheet analysis, again, don’t be in this space. But if you want to look at where the growth is coming, it’s on companies that are looking outside of Canada. And so if you need to be looking at the US, you need to be looking at Germany, you need to be looking at Latin America, these are going to be the big growth markets. Canada is 30 million people; even if we are proportional representation of consumer marijuana is higher, it’s nowhere going to be near what we can generate.
And as I said, already looking at Arcview and BDS Analytics, they’re great analytics group that cover the space, yeah, they’re estimating about $10.5 billion. California might do $4 billion to $5 billion. And the other interesting thing is that, you know, on the Canadian market side, the rollout of legalization, I don’t want to call it a disaster, but it hasn’t been great, and particularly in Ontario, it hasn’t been great. And one of the reasons is because, if you look in California and Colorado, the growth markets are edibles and vapes, because the group of people that are embracing recreational medical marijuana are, overall, new users. It’s not the black market, it’s new users.
And these are not people that, like, used to be (unintelligible) [0:06:12], these aren’t people that like to spark up a joint at a cocktail party, right? There is a social stigma around it. So where we see the growth is on the vapes and the edibles, and those aren’t even legal in Canada yet. So even Canada has more room to go, and in the US, you’ve already got a fully integrated market at the state level.
So you look at someone like Curaleaf, for example, with their recent acquisition; they’re going to probably generate more revenue than Canopy next year, but they’re one-third of the market cap. So we’ve got to keep our eyes on this. And I have to Canopy and Aurora, and Organigram, their guys are trying this as well, that they realize that yes, there is an impetus to look at the balance sheets of these companies; but there’s also an impetus that if I’m going to rely on Canada, then I’m missing this larger global story, which is really going to drive things on a go-forward basis.
James West: Right. Do you think Canada’s restrictions on advertising, packaging, branding, and all the things that California doesn’t have restrictions on, which gives it a way more robust sort of client base, and sort of sales volume, do you think that’s really hurting the industry in Canada?
Mark Noble: There’s no question in my mind. I mean, if you go on, you know, there’s even companies that aren’t even in existence as really a public company, so I know, like, Caviar Gold, for example; I mean, they have huge Instagram presence. They have a huge social media presence, there’s a culture around recreational cannabis, and yeah, they’re building a brand, right?
And then the other thing is, you know, when you look at – and I do go out of my way to look at the brands that are selling at Ontario Cannabis Store – and, like, they don’t necessarily correlate to the market share of the companies, right? So eventually what ends up happening is, well, on the recreational side, that’s a consumer business, and then the medical side is a pharmaceutical business. And basically, the rules of consumer are going to apply to recreational, which means marketing, social media, brand recognition. And I would say the advertising restrictions on the Canadian market have really impacted the large Canadian LPs, because they can’t deploy their capital into marketing.
And so, you know, when I go to a shelf and I see a whole bunch of brands that mean nothing to me, it’s really at the behest of trying to figure out just kind of cost and what I’m looking for in terms of purchasing, because there’s no marketing that’s occurring there.
James West: All right. Mark Noble, Senior Vice-President of ETF Strategy for Horizon ETFs Management – brilliant discourse as usual. I can’t wait to have you back soon. Thanks for joining me again today.
Mark Noble: My pleasure.
