After hiding in the shadows for decades, the
cannabis movement is experiencing a long-overdue coming-out party.
Following the legalization of recreational marijuana in Canada, and
the ongoing push to legalize at the state level in the U.S. and in
various countries around the world, the potential for legal
marijuana is truly budding.
Projections by various sources suggest that legal
marijuana could become, at minimum, a $50 billion a year industry
(globally) by 2029, with peak sales potential of as much as $166
billion. That's not a dollar figure Wall Street and investors
will easily overlook.
Image source: Getty Images.
But what you may not realize is that traditional
dried flower won't necessarily be the marijuana industry's
workhorse. Rather, the younger generation of adult cannabis users
prefer derivative products, such as oils, edibles, infused
beverages, topicals, concentrates, sprays, and vapes -- the latter
of which projects to be a leading source of derivative revenue
generation for cannabis companies.
According to regulatory agency Health Canada, all
forms of derivative consumption, save for alcoholic infused
beverages, should be legal by no
later than the one-year anniversary of Canada's recreational
legalization date, Oct. 17. That's going to roll out the red (or
should I say "green") carpet for these significantly higher-margin
products, relative to dried flower, and give cannabis stocks all
the more incentive to expand their portfolios to include popular
Late last week, that's exactly what we saw happen.
San Francisco-based, PAX Labs, a vaporizer
powerhouse and the company that developed the extremely popular
Juul device that was spun out in 2017 via Juul Labs, announced on
Friday that it had signed agreements with four Canadian pot stocks
to supply it with cannabis extracts, resins, and distillates for
its PAX Era pen-and-pod vape system. The PAX Era aims to be the
go-to vaping device in Canada, assuming Health Canada does indeed
legalize new forms of consumption by this coming October.
The four companies chosen to partner with PAX
Labs were Aurora Cannabis (NYSE:
ACB), Aphria (NYSE: APHA),
OrganiGram Holdings (NASDAQ: OGI),
and The Supreme Cannabis Company (NASDAQOTH:
SPRWF). You'll note that the largest marijuana stock by
market cap, Canopy Growth, and one of the more
controversial pot stocks, Tilray, are notably
absent from this partnership.
You're probably wondering why PAX Labs chose
Aurora, Aphria, OrganiGram, and Supreme Cannabis as its supply
partners. The answer, I believe, is twofold.
First, all four of these marijuana growers have
made clear the importance of diversifying into derivatives. For
instance, Aphria is constructing an extraction
center with 25,000 kilos of annual extraction capacity for the
expressed purpose of meeting derivative demand.
Similarly, OrganiGram recently announced a phase
5 expansion at its Moncton facility in New Brunswick, part of which
would be devoted to additional extraction capacity. In an interview
with BNN Bloomberg,
OrganiGram's senior vice president for marketing, Ray Gracewood,
noted that roughly a quarter of its cannabis is being set aside for
an expected surge in vape demand.
And then there's Aurora Cannabis, which has
either pushed into or announced its desire to add nearly every type
of derivative product at some point. Since derivatives carry a much
higher margin than dried cannabis, they'll be an important
component of any successful growers' lineup of products.
The second reason Aurora Cannabis, Aphria,
OrganiGram, and Supreme Cannabis make sense as partners is that
they bring different consumers and varying product qualities to the
table. OrganiGram, for example, caters primarily to the
adult-use market. Meanwhile, Aurora Cannabis has a stated focus on the
traditionally higher-margin medical marijuana community. PAX has
stated that it would like to go after both sides of the aisle when
Health Canada waves the green flag on new consumption options, and
partnering with cannabis stocks that have a unique focus on the
adult-use and medical marijuana market will help it meet this
There's also strength in PAX Labs being able to
offer top-notch quality for its PAX Era device. That's where
Supreme Cannabis comes into play. Even though Supreme Cannabis'
7Acres facility will only produce a modest 50,000 kilos per year
when at full capacity, Supreme is one of a rare number of growers
focused on ultra-premium
and premium-quality cannabis production. More affluent
consumers who don't have ties to traditional cannabis culture are
Supreme's core customers. And since these well-to-do consumers have
money, they're less likely to have their buying habits changed due
to fluctuations in Canada's economy.
Clearly, there's going to be quite a bit of vape
competition, especially with Altria entering
the space via a $1.8 billion equity
investment in Cronos Group, which closed in
March. Then again, PAX is about as established a name as there is
in the vaporizer segment. This suggests Aurora, Aphria, OrganiGram,
and Supreme Cannabis may have just landed one heck of a valuable
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Sean Williams has no
position in any of the stocks mentioned. The Motley Fool recommends
OrganiGram Holdings. The Motley Fool has a disclosure