- Organigram is as close to profitability as it has ever been
- A review of Canada's Cannabis Act could change the game for the industry
- US legalization is getting closer, and Organigram has an in with British American Tobacco
Investing in pot stock has been one wild ride for OrganiGram (NASDAQ:OGI). The industry got off to a rip-roaring start, saw its value increase meteorically, and then slowly faded away as the hopes and dreams of cannabis profits slipped away. Now, roughly four years after the legalization of adult-use cannabis in Canada, it seems it might be time to get bullish on Organigram again.
Among the best-run since the beginning, the company has been working tirelessly to grow and reach profitability and is as close as ever. Among the Q4 2022 achievements are the 3rd consecutive quarter of positive adjusted EBITDA, but there are more catalysts on the horizon than one.
1. Organigram Is On Track For Real Profits
As cautious as it is, the Organigram Q4 earnings report is as exciting an earnings report to have come out of the cannabis sector since the illicit substance entered the mainstream. The company’s revenue surged 82.7% to C$45.5 million, not on some one-off sale but on the company’s relentless pursuit of excellence. This pursuit has garnered it the 3rd spot regarding Canadian market share and the #1 spot for many key categories.
The revenue is 4200 basis points better than expected, as well, and accompanied by very promising margin news as well. The company’s adjusted gross margin expanded by 1300 basis points to 23%, and the adjusted EBITDA came in at C$3.2 million, reversing last year’s loss of -$4.8 million, all driven by volume leverage and internal efficiencies that include a 10% increase in yield.
The best news is the guidance for F2023. The guidance is very cautious and gives no concrete numbers but uses language that implies revenue will be “higher” than in the previous year, margins will “improve”, EBITDA will experience “significant growth,” and free cash flow will be “positive.” That adds up to positive EPS and should be one significant catalyst for the stock.
2. Canada Is Reviewing The Cannabis Act
Canada announced it would review the Cannabis Act in September 2022, which is good. As good a move as it was, the Cannabis Act was flawed and created many hurdles that plagued the market since it opened. Among the areas of impact to be discussed are the availability of low-cost, regulated cannabis and the displacement of the illegal market.
If the 5-member panel finds either of those areas lacking, there could be some major changes to the act. Criticisms of the act are hurdles to entry, logjams in the permitting process, difficulty operating outside of home provinces, and an inability to reach the addressable market. If these issues are overcome, Organigram could see a boost in revenue, margin, and profitability above and beyond what it is already forecasting.
3. The US Market, It’s Getting Closer
The US midterm elections didn’t do much for cannabis chances on Capitol Hill, but there are signs US federal-level legalization is closer than ever. A pair of recent surveys, one by the American Banking Association and the other by Pew Research, show that most Americans favor the legalization and regulation of cannabis. In this light, it’s only a matter of time before legislation makes it to the Senate that can be passed, and Organigram has a big partner in British American Tobacco (NYSE:BTI)
The Technical Outlook: The Bottom Is In For Organigram
Organigram shares have been bobbing along a bottom for about six months now, and they may be ready to move higher. The post-release action has them up about 5% and well off the bottom in a move that confirms support at the short-term moving average. If the market follows through on this signal, the stock should reach the $1.10 level at least. If the market can get above that, a fuller reversal may be in play.
