In late 2019, Health Canada passed legislation that would allow for the sale of cannabis derivative products. Many analysts refer to the development as Canada’s cannabis 2.0 market and we are bullish on the growth prospects that are associated with the sale of these products. We found the improvement in the types of products that could be sold to be an important catalyst for companies that are levered to this high-margin vertical and will monitor how it performs in 2021.
For readers who do not understand the significance of this development, we want to provide a brief explanation of it. Cannabis derivative products include but are not limited to these products: edibles, beverages, vape pens, concentrates, topicals, and more.
We have conducted significant analysis on the performance of cannabis derivative products in the US and noticed that consumer demand has been steadily increasing. Although we are seeing a similar trend in Canada, Health Canada has made the process of bringing products to market more difficult when compared to the US and this served as a headwind for companies that are levered to this vertical.
In 2020, we noticed increasing sales of cannabis 2.0 products in Canada and expect this trend to become more significant on a year-over-year basis. We consider the cannabis 2.0 market to be an attractive growth market due to the amount of consumer demand and the economics that is associated with the product category.
When compared to cannabis flower, cannabis 2.0 products are more expensive at the consumer level and we are favorable on the impact it should have on profit margins. The combination of these traits are starting to be reflected in company quarterly earnings reports and we expect to see an even larger impact in future earnings reports.
Although there has been a substantial increase in the number of companies that are selling cannabis 2.0 products, the average operator is smaller than the average US company that sell these products. Over the next year, we expect to see a divergence in Canada’s cannabis 2.0 market and want to highlight 3 operators that we expect to be leaders in the vertical.
HEXO: Cannabis 2.0 Makes the Company a Turnaround Story
HEXO Corporation (HEXO.TO) (HEXO) is a turnaround story in the making and the Canadian Licensed Producer (LP) has benefited from the strategic partnership that it has with Molson Coors (TAP.CN). The companies formed a joint venture that will sell cannabis beverages under the Truss brand and we are impressed with how the relationship advanced in 2020.
Last month, the Canadian cannabis producer reported first quarter financial results that showed impressive growth. HEXO attributed some of the growth to the cannabis 2.0 market and we expect this trend to continue in future quarters. When compared to the prior quarter, revenue from cannabis beverages increased by more than 50% and this is a trend to be aware of.
In the earnings report, HEXO’s management stated that the company is the fourth largest recreational cannabis company in Canada from net sales standpoint. The company also reported that Truss is the top beverage brand in Canada and has the largest market share for hash.
During the last year, HEXO has bounced well off its lows and we believe the cannabis 2.0 market served as a major catalyst for the business. Going forward, we expect the company to be reporting ramping revenues in quarterly earnings reports and expect the leverage to the beverage market to serve as a key growth driver for the entire business.
Namaste: A Cannabis 2.0 Company that is Flying Under the Radar
Namaste Technologies (N.V) (NXTTF) is a Canadian cannabis company that has attractive leverage to the 2.0 market and is an opportunity that we have been closely following. We believe the company has been flying under the radar and are bullish on the growth prospects that is associated with it.
Last week, Namaste launch a new brand that is specifically focused around 2.0 products. The brand is called Roilty and we are favorable on the growth prospects that are associated with it. After Namaste completed the acquisition of CannMart Labs, the business has the ability to develop high quality products for a price that is lower than competitors.
Namaste plans to position Roilty as a high-end, accessible mainstream brand and will monitor how the management team is able to execute on this project. CannMart’s facility is completed for BHO extraction and uses state-of-the-art extraction technology. There are only a handful of companies that have similar capabilities and we believe that this further differentiates Namaste from other Canadian cannabis operators.
Initially, Namaste will sell vape cartridges, live resin, and shatter. The facility provides Roilty with the ability to expand the product line to include rosin, capsules, tinctures, and edibles. Through a multi-faceted distribution strategy, Namaste will sell medical products through CannMart.com and recreational products through its network of provincial sales partners.
During the last year, Namaste has been under considerable pressure and we believe the market is not assigning much value to the cannabis 2.0 side of the business. Going forward, the name of the game for Namaste is execution and will monitor how the management team is able to drive the business forward.
Canopy Growth: A Fully Funded Global Growth Story
Canopy Growth Corporation (WEED.TO) (CGC) is the world’s largest cannabis company and has the strongest balance sheet in the entire sector. The company is highly levered to the cannabis 2.0 market and we expect quarterly earnings to show improvements as this aspect of the business continues to ramp up.
With more than $1 billion of cash on the balance sheet, Canopy Growth is well positioned to capitalize on Canada’s 2.0 market, and we are favorable on the strength of its balance sheet. Going forward, we expect Canopy Growth to grow through organic and inorganic growth initiatives and will monitor how the management team utilizes the cash for growth.
Canopy Growth owns one of the largest chains of cannabis retail stores in Canada and we are bullish on the structure of the operation. The company also has a strategic relationship with a leading US multi-state operator (MSO) and is positioned to capitalize on this market once federal legislation changes.
We believe that Canopy Growth represents a well-rounded growth opportunity and will monitor how the story continues to evolve. The recent trend for Canopy Growth has been to the upside and momentum has been steadily climbing.
If you are interested in learning more about the companies that are capitalizing on Canada’s cannabis 2.0 market, please send an email to email@example.com with the subject “Cannabis 2.0 Market” to be added to our distribution list.