3 Cannabis stocks that greatly benefit from the rising demand for medical weed in Germany

by druginc

3 Cannabis stocks that greatly benefit from the rising demand for medical weed in Germany

Financial - Some have questioned the supply and demand events of cannabis companies because of the perceived lack of demand, which in some countries floods the market with too much supply.

At the moment, at least in Canada, the biggest problem was the extremely slow licensing process for retailers, which allowed the black market to flourish and significantly lower the price of weed than their legal counterparts due to the inability of cannabis producers to scale to the point and further reduce costs. That and excise duties are the main reasons for the competitive disadvantage of legal marijuana companies.

The problem right now is not oversupply, but the lack of outlets to serve customers. There is a lot of demand, due to the lack of places to sell, there has been an artificial oversupply that is not so much related to market conditions, but the government that is taking off too slowly. With that in mind, the oversupply issue is real, not because of a lack of demand, but because of a lack of stores. This will be remedied step by step, but it will take time to improve.

As a result, investors are worried about what companies are going to do with their abundant offerings, and part of the answer for some of them is the fast-growing German market for medical weed, which is expected to have a strong growth trajectory over the next five years.

Prohibition Partners, a market information company, recently released a report on the potential of the cannabis sector in Germany, the largest market for medicinal cannabis in Europe.

In 2017, the first year that medical cannabis was legalized in Germany, 1.200 kilos of cannabis was imported. In 2018 that rose to 3.000 kilograms, and in the first half of 2019 it was already about 2.500 kilograms.

As for Prohibition Partners' outlook regarding the number of German cannabis patients in Germany, they are likely to see it grow to over 1 million patients by 2024.

In this article we will look at why this will benefit Canopy Growth, Aurora Cannabis and Aphria in particular.

Canopy Growth (CGC)

Many in the market were surprised when Germany stopped Canopy Growth in its domestic licensing process. At the time, Canopy was considered the industry leader and it was expected to become a production player in Germany.

That did not work, but the company entered the German market in a different way through the acquisition of the German Cannabinoid Compound Company. When the deal was announced, the company was serving approximately 19.500 patients. It generated revenue of $ 41,5 million for the full year 2018.

One of the biggest issues for Canopy Growth is that it went through a period of schizophrenia with regard to its target as it has stated in the past that it was primarily a recreational weed company targeting the Canadian market and then targeting the U.S. market (via Acreage Holdings call option), and is now looking for growth in the medical cannabis market in the EU. That is why the thought from the market is that a new CEO should first be given who can clearly outline the vision and direction of the company.

Although it seems that Canopy should participate in the fast-growing German cannabis market, it is therefore considered a secondary step for that reason. Certainly if the American and Canadian cannabis markets are taken into account in the short term.

It is also a mystery to some people why a company that generates $ 90,5 million in revenue per quarter is looking for a much smaller German market.

It will pay off in the long run as the number of German cannabis patients rises to over a million in a few years, but until that happens, the company may be missing better growth opportunities in North America over the next few years.

Shares of Canopy Growth have cashed in quite a bit in 2019 and analysts are divided on whether to become more optimistic about the stock, while others argue that the rest of the year will be challenging as well. In the past three months, the cannabis maker has received 8 'buy' ratings versus 8 'keep' ratings. That said, the consensus average price target points at $ 34,76, or more than 70% upside for the stock. This suggests that the bulls are still winning on Canopy. See also the Canopy Growth analysis by TipRanks.

Cannabis shares: The expectations of the Canopy Growth share
The expectations of the Canopy Growth share CGC (Source)

Aurora Cannabis (ACB)

For Aurora Cannabis, the German market is very logical, since it has been clearly stated from the outset that it is primarily a medicinal cannabis company, so this corresponds to the goal.

One of the challenges for Aurora is the lack of GMP-compatible cannabis that it can sell in the EU, which is remedied by the recent completion of a number of facilities in Canada that will ship products to Germany and other EU markets.

This is one of the areas where demand exceeded supply, and with the addition of more compliant EU cannabis, international sales of Aurora should increase significantly in the coming quarters and years.

Probably not many investors are considering the long-term potential of Germany, and with Aurora's export capabilities and licensed facility in Germany it is poised to enjoy long-term growth in the EU medical cannabis market.

This will also reduce part of the oversupply on the market when it actually arrives.

Again, when over-supply is discussed in this article, it is necessary to distinguish the temporary restrictions on the Canadian market due to the slow permit approval process and the eventual over-supply that comes from an abundance of weed that exceeds demand. That moment will eventually come.

The presence in 25 countries will help Aurora overcome the surplus supply that will eventually torment the cannabis industry, while maintaining strong margins associated with the medical cannabis market.

According to TipRanks, the Wall Street consensus is that ACB shares are a hold for investors. But TipRanks might as well have said "buy," as analysts believe the stock, currently at $ 3,61, could advance to $ 6,63 within a year, yielding more than 80% profit for new investors. See also the Aurora stock analysis by TipRanks.

Cannabis shares: The expectations of the Canopy Growth share
The expectations of the Aurora Cannabis ACB share (Source)

Aphria (APHA)

Although Aphria will not produce Aurora Cannabis and Canopy Growth close to the amount of cannabis, it has for the time being benefited from generating profit as it grows.

It has been said earlier that the smaller companies will benefit from the slow licensing rate in Canada, which will change over time as the larger producers scale to meet demand, as more outlets help reduce costs and eliminate the proportion of illegal weed sellers.

Aphria is in a unique position to be the third largest cannabis producer in the world and stands between the many smaller producers and the two production giants mentioned above.

If it can keep its costs low as it grows, it should significantly benefit from the growing German market for medical cannabis, which will further increase its margins and presumably improve the company's long-term profitability.

Cannabis shares: The expectations of the Aphria APHA share
The expectations of the Aphria APHA share (Source)

Conclusion about these cannabis shares and the German market

There is a lot of concern about the final global situation of cannabis surplus coming, but it is expected that this will only be temporary.

This is proven by the growth trajectory of the German medicinal cannabis segment and the high probability that it will also legalize recreational weed in Germany in the coming years.

The cannabis companies Aurora Cannabis, Canopy Growth and Aphria have positioned themselves to be able to meet this huge expected demand at least up to 2024 in the coming period, before the growth flattenes out.

Of these three companies, Aurora Cannabis and Aphria seem the best in the long term because of the licenses they receive, but the German market is also expected to be good for Canopy.

The problem for Canopy is if it gives up too much in North America for what is considered less potential in the EU.

The bottom line is that these three companies, with regard to oversupply, will not stand the negative effect of others because of their international exposure. Aurora Cannabis, due to its leading international presence, is expected to do best in the long term.

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