Organigram Is Still On Track For Profitability
Organigram (NASDAQ:OGI) rocketed higher after the FQ4 report because headwinds were abating while tailwinds were increasing. The stock has drifted upward since then and was heading higher until the Q1 2021 report was released. The report shows a shocking decline in YOY revenue that has helped drive share prices down more than 12% in early trading. While the decline in revenue is important and an overall negative, once you dig into the data it’s easy to see today’s drop in share prices is yet another opportunity to buy into this growth story.
Organigram Revenue Falls 25%, Oh No!
Organigram had a good quarter despite the 23.1% decline in YOY revenue. The decline was expected, for one, and the reason for the decline is easy to write off. The company had what it calls an “opportunistic” series of sales to wholesale clients in the 1st quarter of 2020 that it didn’t have in 2021. The good news is that the consolidated net revenue of $19.33 million is $3.5 million or 22% better than expected and underpinned by sales in the company’s key market; recreational adult use.
In terms of the core market, adult recreational sales increased by 30% YOY and 11% sequentially to $16.8 million. Sales were driven by growth across all product lines with notable strength in the company’s new SKUs and the value-brands in particular. The SHRED label, ready to smoke flower at a value-oriented price point, was the #1 search term on Ontario’s cannabis website.
Moving down the report the details are equally good save for one time. The company is still writing off value related to inventory and declining prices in the market. This situation led to GAAP EPS of -$0.17 which is well below the consensus target. In terms of cash flow and the balance sheet, the reality of business is much better. The company generated the second quarter of three with positive cash flow and an improvement to the balance sheet. Cash on hand increased to $134 at the end of the quarter. The company has since paid off $55 million in debt leaving about $75 million in cash and $79 million in debt.
Looking forward, the company believes it is well-positioned to benefit from three growing tailwinds. The first is legalization 2.0. Vapes, edibles, and consumables are attracting new customers not interested in smoking. The second is the number of stores. The number of stores has grown 47% across Canada since July with Ontario’s growth in the triple digits. Ontario is, of course, Organigram’s core market.
“We believe our product portfolio revitalization combined with additional resources to ramp up production and achieve greater economies of scale as well as our relentless focus on increased automation and cost efficiency opportunities position us well to generate further top-line growth and significantly improve gross margins,” said Greg Engel, CEO of Organigram.
The Technical Outlook: Orgnigram Falls But Buyers Scoop Up Shares
The FQ1 report has shares down hard in the early morning session but the market is using it as a buying opportunity. Down -10% at the open, the mid-morning action has the price up closer to -7.5% and forming a green candle. The price action confirms support at the short-term moving average and a budding bull market that is forming in cannabis stocks. Price action may wallow at or near the $1.50 level before moving higher but a move up to retest the $2.00 is expected.
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