Here's Why This Small Marijuana Stock Is Soaring Today

Maxx Chatsko, The Motley Fool - finance.yahoo.com Posted 5 years ago
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What happened

Shares of Neptune Wellness Solutions (NASDAQ: NEPT) rose nearly 19% today after the company announced that it had received a license from Health Canada to begin processing cannabis. (The Motley Fool contributor George Budwell announced the news before the company did.) The license allows the company "to handle dried cannabis, to manufacture and purify cannabis extracts and cannabis oil, and to sell its services to other license holders." 

Put another way, the sub-$300 million company, which specializes in extracting active cannabinoid compounds from raw cannabis, can begin commercial operations in the marijuana space. Can the tiny company deliver and exploit the broad suite of emerging opportunities? As of 12:31pm EST, the stock had settled to a 13.1% gain.

A hand pulling up the last and tallest column on a bar chart.

Image source: Getty Images.

So what

Management has laid a promising foundation in recent years. Neptune Wellness Solutions has strategic relationships with Canopy Growth Corporation and Lonza. The business is on track to grow its annual processing capacity to 200,000 kilograms of cannabis by March 2019, up from just 30,000 kilograms of cannabis today. That will make it one of the largest cannabis processors in Canada. With a processing license now in hand, the company can begin to sell that extra capacity and significantly diversify its customer base.

President and CEO Jim Hamilton also stated that the company is currently seeking a second license from Health Canada allowing it to sell cannabis products directly to consumers and patients. That would further diversify revenue away from its current services-focused platform.

Now what

The cannabis processing license from Health Canada marks an important milestone for Neptune Wellness Solutions, which to date has generated revenue only from its legacy nutraceutical business. That segment delivered $12.2 million in revenue and $3.8 million in gross profit in the first half of fiscal 2018 (the six months ended Sept. 30). Investors are hopeful that the opportunities in the marijuana industry can lead to significant growth in the year and years ahead, but the company's market cap of under $300 million suggests Wall Street wants to see some traction before getting too carried away. That appears to be the right strategy given the volatility of the industry and unproven nature of the business.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.