Supreme Cannabis: A Big Revenue Increase and whether you should buy

Supreme Cannabis printed a big increase in revenues.  But, they missed on earnings.  I had previously made a call on CGC Stock and a follower wanted to know if I stuck to that analysis.  Despite the impressive jump in revenues, I am going to go neutral on this stock right at this time.  Here I will break down all of the financials to explain why.

In the meantime, one of the biggest reasons why I am going neutral has more to do with where cannabis stocks are in general versus any one particular stock.  Cannabis stocks have all moved significantly higher because of the Reddit attack and now investors are cashing out.  My expectation is that these stocks will sell off to pre-January levels.  Then, investors can buy cannabis stocks that make sense at valuations that make sense.

Here is the chart on CGC Stock:

Supreme Cannabis Stock SPRWF
All cannabis stocks are selling off; Supreme cannabis will follow

Supreme Cannabis Revenues

Supreme Cannabis Revenues

This is impressive.  Supreme Cannabis pulled in a solid revenue increase the past quarter.  This is solid revenue and it will help to improve cost metrics.  The entire industry is expanding significantly and having a company expand in kind is one of the first keys to finding a solid company.

The stated goal on Supreme Cannabis’s conference call was to streamline costs and push for solid revenue growth.  If this number is consistent then I believe the first box has been checked.  The revenue growth is some 66% higher than the previous quarter.

Generally, Supreme sold increased products across the board.  In the earnings release, they stated that they were capable of fulfilling orders more effectively and this was a large contributor towards revenue growth.  That will be key to including this metric into future revenue expectations.

Let’s look at other financial metrics.

Supreme Cannabis Gross Margins

Supreme Cannabis Gross Margins
Supreme Cannabis needs to become more consistent with margins and selling wholesale products

Whereas revenues increased significantly, margins are still well below what could be optimal.  The previous two quarters reported write-downs on inventory and that is what drug gross margins so low.

But, if you weed through the numbers, Supreme Cannabis states that they nearly doubled their unit sales while the wholesale price moved upwards approximately 3%.  This tells me that they have price control across the board.  I am encouraged by this.

This ultimately gave Supreme Cannabis an approximate 49% gross margin.  But, due to operational structures, the margins were lower.  The previous quarter’s in-kind numbers were some 51%, so the 49% was. slight decline.  Yet, the selling price went up some 3%.

Eventually, I expect that operational costs will be worked out and that the end result will be increased overall margins with what you can see in this chart above.

Supreme Cannabis Operating Efficiencies

Supreme Cannabis Operating Efficiencies

Here is where I begin to wonder about the numbers with Supreme Cannabis.  They stated that they increased sales by double, and the selling price achieved was 3% higher.  Operational costs moved margins downward and yet with total operating costs moved lower.  Unfortunately, there is not enough detail in the financial documents to figure out what is going on here.

Nonetheless, at 40.3%, this is a good number.  It is not the best that I have seen but management’s stated goal was to lower costs through streamlining.  It is one of their top-stated goals.  So, if total operating efficiencies could push downwards to about 35% this will do well for the bottom line.

Supreme Cannabis Net Earnings

Supreme Cannabis Net Earnings

I had hoped that with such a large increase in revenues, economies-of-scale would have won the day and net earnings would have achieved profitability.

Future guidance is that Supreme Cannabis will continue to print positive EBITDA revenue.  And, with a focus on cost efficiencies, eventually, Supreme Cannabis will be net revenue positive.  I do not focus too much on EBITDA, despite its positive connotations.  My focus is on the end result which is net earnings.  This is what drives the stock price since we can then do a forward look with EPS to determine a stock price target.

Conclusion

When I made my call back in December, CGC Stock was trading at about $0.15 per share.  It had since moved upwards over 200%.  That was not genius on my part that was the luck of Redditers pushing the price upwards.  That being said, I am neutral on cannabis stocks since they are overpriced and falling down.

I was asked about this call and I think eventually Supreme Cannabis will achieve its goal of net profitability.  Management is focused on costs and states that many times.  Net earnings will go up once they achieve this.  The margins from the write-downs will eventually hit where they need to.  But, even at 49%, that is slightly lower than all of the other numbers I see.  I would hope that since Supreme Cannabis has sold 2x the number of products they would also simultaneously be able to price the products appropriately while simultaneously achieving input cost controls.

At the same time, operational costs, I believe, have a small amount to go.  This could very well be a long-term winning stock pick.

But, as far as the stock price goes, I am staying to the side on Supreme simply because many cannabis stocks are selling off.  CGC Stock will follow suit just as it went upwards recently.  That is a buying opportunity.

What are my favorite cannabis stocks?

Find out which are the best marijuana stocks to buy now!

This is a once-in-a-lifetime opportunity to get involved in cannabis investing and capitalize on a new industry that is booming… But, only some of the stocks are going to be real winners.

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