Cannabis Extractors the Next Big Craze? 2 Stocks Investors Should Watch

Cannabis extractors

A new breed of cannabis company dubbed as “cannabis extractors” has recently emerged. Simply put, these are the companies that take cannabis flower and turn it into highly concentrated cannabis oil.

Because there are scores of people who prefer consuming cannabis via oils, tinctures, creams, edibles, and vapes over the more-traditional smoking method, the market for concentrated cannabis oil is huge. It is, potentially, going to be bigger than the dried-flower market in the not-too-distant future.

This is one of the reasons investors shouldn’t overlook cannabis extractors as an investment play. The business model is quickly gaining momentum, and certain brands are on the map.

So with that in mind, two of the biggest opportunities here, arguably, come in the form of Valens GroWorks (CSE:VGW) (OTCQB:VGWCF) and MediPharm Labs (TSXV:LABS) (OTCQX:MEDIF).

Cannabis Extractors: The Leading Names

Investors should note: While cannabis extractors focus purely on turning dried flower into oil, there are of course companies such as Aphria (TSX:APHA) (NYSE:APHA) that take care of this process themselves and don’t look to a third party. But for those without extraction methods in-house, you can bet they’ll invite the help of a third party as the demand for oil equals huge revenue potential. This is what makes this arm so lucrative.

Valens GroWorks

With deals with major cannabis brands Canopy Growth (TSX:WEED) (NYSE:CGC), Tilray (NASDAQ:TLRY), OrganiGram Holdings (TSXV:OGI) (OTCQX:OGRMF), and The Green Organic Dutchman (TSX:TGOD) (OTCQX:TGODF), Valens GroWorks is arguably the hottest cannabis extractor stock out there.

Its multi-year agreements see it operate entirely as a third-party cannabis extractor; hired on a case by case basis under a business model known as “tolling.”

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Tolling means that Valens is paid a flat fee per gram to take a grower’s flower, turn it into oil, and return the finished oil to the grower. The grower then sells it to market.

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By providing its services on a contractual basis, Valens GroWorks can estimate with total accuracy what its revenue will look like. And business is growing fast.

The company is now online to produce oil from 240,000 kilograms of dried cannabis and hemp in 2019. Compared to 72,000 kilograms in March 2018, it has more than tripled its output.

This secures its position as the largest third-party cannabis extractor in Canada. Further, with the edibles market expected to come online later in 2019, the company anticipates significant revenue increase once again.

In its recent fiscal 2018 results, Valens reported: “no debt, and approximately $25.2 million in cash and short term investments.” Further, with the industry growing, this company has a bright future ahead.

Year-to-date, shares have already gained roughly 260%. But at $4.05 CAD on the CSE, there still remains a lot of potential ahead for investors.

MediPharm Labs

MediPharm Labs also counts Canopy Growth as one of its clients, along with The Supreme Cannabis Company (TSX:FIRE) (OTCQX:SPRWF) and AusCann Group (OTCQX:ACNNF). Most recently, it added TerrAscend (CSE:TER) (OTCQX:TRSSF) to its list in early 2019.

Selling for $6.35 CAD on the TSXV, these shares have increased more than 500% since the beginning of the year, showcasing a rising demand for cannabis extractors.

Earlier today, MediPharm released its Q4 results, which showed a 115% increase in revenue year-over-year. On the release, shares are up over 10% at present.

Monthly revenue is increasing sequentially also. In the period that ended March 31, revenue came in at $22 million—double the preceding quarter.

CEO Patrick McCutcheon spoke about the milestones already hit this year:

“Our very strong start to the year included signing our fifth, three-year tolling agreement, with TerrAscend Corp., and completing two new private label supply agreements in the quarter, raising the total potential value of our private label sales agreements to in excess of $85 million over a 15-month period from December 2018. This strong sales momentum continued well into the second quarter, with several new agreements in process and a healthy pipeline beyond those.”

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A similar story to Valens’, the expanded legalization this fall means MediPharm Labs is expecting market and consumer demand to increase significantly. As such, investors could be in line for further gains as the extracts industry explodes.

The Reality of Extracts

Cannabis extractors make for potentially lucrative investments because of the vast number of revenue streams this business model is afforded. Think of it this way: any brand needing CBD/THC-infused food, drink, body-care products, bath oils, creams, pet treats—the list is potentially endless—becomes a potential client of a third-party cannabis extractor.

With Canada alone producing 900,000 kg of cannabis, there will be significant demand for extraction capacity. As consumer demand increases for oil-infused products, the market will develop similar to how legal US markets have developed.

Here, demand has rapidly evolved from smokable flower to oil-based products. For example, in California, the demand is now roughly 50/50 in terms of infused products versus dry flower.

But what do you think? As an investor, are cannabis extractors on your radar?

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