Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
The Australian medicinal cannabis market is speculative, volatile, and dependent on the anticipated growth in demand. Cann Group Limited’s recent plummet captures the current market conditions perfectly. The key two hurdles preventing risk in the medicinal cannabis market include:
- Understanding the genetic makeup of cannabis mixtures for medical conditions
- Having healthy financials
To understand CAN’s 2017-2018 stock rise and the 2019 downfall refer to our extensive article at CAN.
Why has CAN plummeted by 60% in the past month?
Key price-sensitive movement 1: Cann announces a revised strategy in Mildura production facilities -21st November
Cann announced a three-stage approach to the construction of the Mildura Facility. Instead of a one-stage development. Stage 1 is expected to provide 25,000 kgs of dry flower in late 2020. As opposed to 70,000 kgs, under the previous plan. Stage 2 and 3 will be determined in the future.
Cann’s ASX announcement is a strategic decision for the company but a financial setback for shareholders.
Currently, the exponential demand for medicinal cannabis is not a reality. Resulting in many Cannabis companies trying to avoid an oversupply before the demand surges. CEO Peter Crock argues that Can’s multiple stage approach is an attempt to avoid a pre-emptive oversupply and to ensure production facility closely matches with the anticipated growth in demand for cannabis.
Despite the logical reasoning for development, investors have financial concerns. Cann Group increased revenue growth by 2842% over the last year (Q2 2018 – Q2 2019). The initial completion of Mildura in 2020 was “expected to generate annual revenues of $220 million to $280 million”. However, the recent change in the development of Mildura will likely result in a sharp downturn in revenue generation for 2020. Thus, causing investors to sell their shares as forecasted revenue growth might not be a reality for a while. In turn, decreasing investor confidence and so to the share price.
Is it all bad?
Despite the 60% plunge this month, CAN entered an exciting distribution deal with Symbion. Symbion is an Australian wholesaler of health care services with connections to 4000 retail pharmacies and 1300 hospitals. Under the agreement, Symbion will distribute CAN’s imported medicinal cannabis products to Special Access Scheme patients across Australia.
Conclusion: Where to from now
There is no doubt CAN’s licenses, partnerships, and future operations allow them to tap into the cannabis market. Moreover, CAN has an excellent understanding of the genetic makeup of medicinal cannabis through Aurora and Anadia.
However, CAN is unprofitable. Also, the company’s revenue growth is in delay because of Mildura’s development.
Unprofitable companies are always risky. However, if you have a high-risk tolerance, a small bet now while the price is low could lead to a significant capital gain after stage 1 of Mildura is complete.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG