Auxly stock has received little love from investors in recent months. For $0.73 CAD on the TSXV, it is hardly the picture of a great cannabis leader. But with patience and understanding, Auxly Cannabis Group (TSXV:XLY) (OTCQX:CBWTF) might surprise investors.
With a market cap of $432 million CAD, Auxly is a small-cap cannabis play. With competitors such as Canopy Growth (TSX:WEED) (NYSE:CGC) boasting market caps in the billions, it can be difficult to see how this company and its stock will survive such a crowded market.
But what gives this company a potentially lucrative position down the line is its unique business model.
Until the middle of 2018, Auxly Cannabis Group operated as a royalty company. Similar to how precious-metal royalty companies give money to their licensing partners in exchange for mined metals at a below-market cost, Auxly took that same business model and applied it to cannabis. Auxly would then sell this dried flower at the full market rate, and the difference would be pocketed as profit.
A year ago, Auxly diversified its model to also became its own grower, supplier, and seller. So now, it benefits from its dozen licensed partners along with its own joint venture and wholly owned grow projects in its portfolio.
A result of all its efforts means that all-in-all, Auxly Cannabis Group is online to bring about 170,000 kilos of cannabis to market annually.
To put that in perspective, there are roughly only five or six individual cannabis growers that will top that—but they are all backed with much larger market caps.
So What Now?
So where does this leave Auxly stock? Well, in order to finance its licensing deals, the company has issued a lot of stock to raise funds. In doing so, it has diluted the existing shareholders’ position, and this is never looked on kindly by the market.
Further, management recently made the decision to hold back dried flower sales in the near-term so as to use the flower to create derivative products in the long-term. With derivatives sales only legally allowed by mid-December at the earliest, Auxly stock has suffered again because of the short-term effect this decision will have on the company’s upcoming operating results.
But this decision is likely a long-term positive for Auxly Cannabis Group. And with stock very low at present, the “down-the-line” prospects here are extremely fruitful. Don’t look for 2019, but instead consider 2020 and beyond with this cannabis play.
What are your thoughts on Auxly stock?
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