Did Aurora Cannabis (TSX:ACB) Just Kill Green Organic Dutchman (TSX:TGOD)?

Last year, Green Organic Dutchman Holdings (TSX:TGOD) was the hottest pot stock on the market. The company went seemingly turned into a $2 billion marijuana power player overnight. But over the last year, shares have shed 70% of their value. Green Organic’s market cap is down to just $700 million. The entire cannabis industry is being squeezed, but actions by competitor Aurora Cannabis (TSX:ACB)(NYSE:ACB) are largely to blame.

On September 4, Aurora liquidated its 10.5% stake in Green Organic and terminated its option to purchase 20% of the company’s cannabis production. This has been an ongoing story, weighing on shares for nearly the entire year. While investors continue to abandon the stock, you should pay close attention. Contrary to popular belief, Green Organic is not dead. By playing the contrarian, you could double or triple the value of your investment over the next 12 months.

Here’s the deal

On January 5, 2018, Aurora took a 17% stake in Green Organic, with options to eventually increase their ownership to more than 50%. The stake was purchase at a historic low of $1.65 per share. The investment also granted Aurora the right to purchase up to 20% of Green Organic’s annual organic cannabis production, although there were escalators that would eventually allow Aurora to purchase as much as one-third of the annual output.

In addition, Aurora also agreed to help the company construct its next-gen grow facilities with the help of its greenhouse design and consulting subsidiary. According to the original press release, “TGOD has the potential to become one of the lowest-cost cannabis producers in Ontario and beyond.”

“Teaming up with Aurora, the industry’s innovation leader, provides us with a stable, supportive shareholder, through whom we have access to best-in-class technologies and industry know-how, which we believe will significantly accelerate our time to market,” said Csaba Reider, President of Green Organic. “The supply agreement with Aurora validates our strategy to produce premium priced organic cannabis. With this significant cornerstone investor and customer, we will be able to leverage our deep consumer packaged goods and brand building experience, as well as Aurora’s well-established brand recognition, to pursue rapid growth.”

The aftermath

Over the next 18 months, Aurora declined to pick up its options. This January, Aurora purchased Whistler Medical for $175 million, eliminating its need to rely on Green Organic for organic cannabis. This September, Aurora walked away from the partnership completely. After losing its biggest long-term partner and potential acquirer, TGOD shares now trade at just 2.9 times 2020 sales. That’s one of the cheapest multiples in the industry.

But all is not lost. As mentioned, Aurora helped Green Organic design and build their facilities. This guidance will likely help the company achieve industry-low production costs, as production ramps in the fourth quarter.

Additionally, Green Organic now has the opportunity to achieve much higher profitability. Under the previous agreement, Aurora had the right to buy one-fifth of TGOD’s production at wholesale prices. According to the company, the deal termination “significantly improves TGOD’s revenue and gross margin mix due to the repatriation of TGOD’s premium organic cannabis previously earmarked for Aurora.” Management believes that the “revenue sharing model with Aurora … would have lowered TGOD’s average selling price and margins.”

In short, this short-term pain may pave the way for long-term gain. The big uncertainty, however, is if Green Organic can replace Aurora as a customer. According to Cowen analyst Vivien Azer, one of the leading voices in the market, cannabis sales should reach $80 billion by 2030. He suspects the U.S. could make marijuana federally legal within a decade. That means over the long term, TGOD will likely have no issues selling its output, even if there are a few lean years in the interim.

If the company can achieve progress next year as production ramps, expect the market to re-rate shares quickly. Based on industry valuation multiples, shares could have 100% or 200% upside. It’s a big risk that requires patience, but the upside is clear.

One tiny small-cap stock to bet on ahead of Cannabis 2.0 on October 17th…

The first wave of cannabis legalization minted millionaires out of everyday investors, and it might be about to happen again.

Because when edibles are legalized in Canada on October 17th, experts project a new $2.7 BILLION market will be born.

Our last legalization stock pick is already up 1,211%, and now we’re recommending one tiny small-cap stock before Cannabis 2.0.

This could be our next +1,000% winner in the cannabis space.

Hurry, the second wave of cannabis legalization is about to hit and this stock could skyrocket.

Click here to learn more!

More reading

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Source: The Fool
Did Aurora Cannabis (TSX:ACB) Just Kill Green Organic Dutchman (TSX:TGOD)?
The Fool

The Motley Fool
Contributor at mjcanada.ca
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related News