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This Cannabis Company Just Reported 90% Revenue Growth: Is It a Buy?

Motley Fool - Thu Jul 21, 6:58AM CDT

Cannabis stocks have been falling heavily over the past year. The Horizons Marijuana Life Sciences ETF is down more than 62% as it's clear that the hype and excitement that once propped up the sector has since faded. Investors are no longer impressed with stories of potential and empty promises. They want results -- and many cannabis companies simply haven't delivered.

One exception to that may be OrganiGram (NASDAQ: OGI). The Canadian cannabis producer recently reported its latest earnings numbers, and they were impressive -- sales grew at a rate of 90% year over year. Has this banged-up pot stock, which is also down around 60%, a buy on this news?

OrganiGram reports record sales

For the third quarter ended May 31, OrganiGram's gross sales topped 55.2 million Canadian dollars versus the CA$29.1 million it posted in the prior-year period. Even compared to the previous quarter, this was a significant improvement as the top line was 26% better than the CA$43.9 million it reported in the second quarter.

The company has added new SKUs that have helped give consumers a greater variety of products to choose from, which, in turn, has helped bolster its revenue. OrganiGram's results are impressive, especially when you look at how other marijuana producers have been performing over the past year, struggling to generate much positive sales growth:

CGC Revenue (Quarterly YOY Growth) Chart.

CGC Revenue (Quarterly YOY Growth) data by YCharts.

Why sales growth may not be enough to attract investors

A big reason I'm not overly bullish on OrganiGram is that I'm not a fan of simply adding SKUs and products -- that can lead to inefficiencies and increased costs elsewhere on the income statement. During the period, OrganiGram said it introduced 16 new SKUs. And while the company did post impressive sales numbers, it still has a long way to go in being profitable.

In Q3, the company's gross margin was just CA$8.7 million (before adjustments to fair value), which is 16% of gross sales and 23% of net revenue after excise taxes. That's simply not enough to cover its operating expenses; general and administrative expenses of CA$12.8 million alone easily wiped out the gross profit. OrganiGram's operating loss during the period was CA$11.9 million. The positive is that's an improvement from the CA$9 million operating loss OrganiGram reported in Q2.

But until the company can demonstrate to investors that its business is profitable, attracting investors could be a tough task. That's evident in the little bullishness that followed the stock following the release of its results, as its share price today is about where it was before OrganiGram posted its latest numbers.

Should you invest in OrganiGram?

Despite the strong sales growth, there isn't an overwhelming reason to invest in OrganiGram today. Adding more products can be a way to improve sales numbers, but it may not necessarily translate into profitability. And until it does that, it will be difficult to suggest that OrganiGram is better than other cannabis stocks in the market. Its sales are still a fraction of some of the larger players in the industry (Tilray Brands and Canopy Growth generate more than CA$100 million every quarter). While 90% growth sounds impressive, it's effectively a CA$6.3-million improvement in net revenue from the previous period -- hardly anything to get excited about.

OrganiGram is a stock worth watching to see if it can continue building on these results and inch closer to profitability. But until it can post an operating profit, it's not an investment I'd consider.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends OrganiGram Holdings. The Motley Fool has a disclosure policy.

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