If there’s one thing that will make a stock multiply in value, it’s demand. The more people who want a company’s products, the faster its stock will likely grow. But does that relationship still hold up when demand outstrips supply…
The Canadian cannabis cultivator OrganiGram Holdings (NASDAQ:OGI) is (unintentionally) putting that question to the test in 2021. Up more than 135% so far, its steamroller of a year might be sputtering out thanks to unforeseen difficulties with its cultivation and manufacturing operations that have left it unable to produce enough cannabis to meet demand. Can the company rally in the third quarter to make up for lost time and end the year up more than 200%, or should shareholders accept that its rocketship expansion phase is in the past?
Why it might not double
For a stock like OrganiGram to double in roughly six months, a sizable number of investors need to have a lot of confidence that the company in question is growing very rapidly. Such confidence typically needs to be confirmed and bolstered with new information in the form of favorable earnings reports or other positive developments. Despite the stock’s strong performance in 2021 so far, there could be a dearth of good news for the rest of the year.
OrganiGram reported $14.64 million in net revenue in the second fiscal quarter of this year, which was 37% less than the same three months in 2020. Of concern is that around $7 million in potential sales were lost because the company couldn’t fulfill demand for its products. In other words, the company could have made nearly 50% more than it did. Management attributes this shortfall to a coronavirus outbreak that sickened key production staff. So, the negative revenue impact is likely transitory, but it’s still something that could weigh down the stock’s growth trajectory in the meantime. If there’s a similar mishap in the next earnings report, it’s hard to see how the stock could double again this year.
Then there are stickier issues, like the fact that OrganiGram is nowhere near being profitable. Even when making substantial accounting concessions to adjust the company’s gross margin so that it is relative to the fluctuations in the market price of cannabis, there’s no way to say that OrganiGram is making more money than it is spending. And the non-adjusted figures are quite grim. Its trailing operating margin is negative 211.7%, and its profit margin hasn’t been positive since 2018. Still, optimists will say that it’s precisely this history that will make the market respond all the better if the company does start to report improvements to its bottom line. Plus, unprofitability doesn’t seem like it’s been much of a drag on the stock so far.
Why it’s still possible
Despite the formidable headwinds to rapid growth, I think there’s still a decent chance that OrganiGram could double again before the close of the year. First and foremost, management is predicting that the third fiscal quarter will go much better than the second. It expects that net revenue will improve as coronavirus restrictions ease and more employees are vaccinated, thereby allowing the company to fully serve the demand for its products. Likewise, plant yields appear to be higher now than in the earlier part of the year, which will drive down the cost of production and lead to a considerable improvement in gross margins. Furthermore, as production returns to pre-pandemic levels and then scales up as planned, cultivation costs may fall more durably.
Then there’s the potential impact of the company’s recent acquisition. In early April, OrganiGram announced…
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