Marijuana should be one of fastest-growing industries in North America this decade. There are currently tens of billions of dollars in cannabis sales conducted annually in the black market. If these sales can gradually be moved to legal channels via legalization, large-scale players should see plenty of profit potential.

However, our neighbor to north has completely face-planted in its attempt to be a global marijuana leader.

Canada's pot industry has been a mess

Despite becoming the first industrialized country to legalize recreational cannabis, Canada and its more than a half-dozen well-known licensed producers have struggled mightily.

Part of this blame can be attached to national and provincial regulators. For example, Health Canada delayed the initial launch of high-margin derivatives (e.g., edibles, infused beverages, and vapes) in 2019 by two months, and took far too long to review and approve cultivation and sales license applications prior to the Oct. 17, 2018 launch of dried flower sales throughout Canada.

As for provincial regulators, select provinces have suffered from failed leadership. In Ontario, the country's most-populous province, regulators stuck with a lottery system to assign retail licenses between Oct. 2018 and Dec. 2019. At the one-year anniversary (Oct. 17, 2019) of recreational sales, only 24 dispensaries had been opened in a province that could comfortably house close to 1,000 retail locations. Although Ontario has since moved to a more traditional application vetting process for dispensaries, it's going to take a while before there's an adequate retail presence in the province.

Canadian licensed producers (LPs) are to blame, too. Most of them failed to accurately predict what domestic consumer demand would be like in the early going, and are now being forced to shutter cultivation facilities and take significant writedowns on acquisitions.

 

At some point, the Canadian marijuana industry is going to get its act together. The $64,000 question is, "When will Canadian marijuana stocks be profitable?"

According to Wall Street's consensus estimates, investors are going to need to be patient.

The lone Canadian LP expected to be profitable by 2022

The earliest LP on track to be profitable on a full-year basis is Ontario's Aphria (NASDAQ:APHA). Wall Street believes Aphria can generate $0.08 Canadian in per-share profit in fiscal 2022 (the company's fiscal year ends in May).

However, before anointing Aphria as the clear Canadian cannabis leader, understand that the company's operating results are getting some serious help from its acquisition of pharmaceutical distribution business CC Pharma. In fiscal 2020, total sales hit CA$543.3 million, which was up 129% from the prior-year period. But of this CA$543.3 million, only CA$150.4 million was associated with cannabis. 

Generally speaking, pharmaceutical distribution margins are small and unimpressive. But distribution is a volume-based business that's clearly helping to push Aphria toward recurring profitability. To be clear, I'm not saying investors should punish Aphria for having a successful ancillary business segment. Rather, just understand that pharmaceutical distribution is going to be a drag on the company's margins, and value the company accordingly.

 

This quartet of LPs should be profitable by 2023 (if they survive)

For four well-known Canadian LPs, 2023 looks to be their first opportunity to push into the green. Wall Street projects that Cronos Group, Tilray (NASDAQ:TLRY), HEXO (NYSE:HEXO), and OrganiGram (NASDAQ:OGI) will all turn nominally profitable on a recurring basis in 2023.

Of this group, OrganiGram looks the most compelling. OrganiGram didn't make any overpriced acquisitions leading up to the legalization of weed in Canada, and it has just a single operational facility in Moncton, New Brunswick. If the company can effectively control its expenses and produce superior yields to the industry average, it could easily come out a long-term winner. Investors will, however, need to exercise patience with OrganiGram as it ramps up its higher-margin derivative sales.

On the other hand, it's not even clear that Tilray or HEXO can survive over the long haul. Both companies have been issuing stock and diluting their shareholder to raise capital, all while losing money hand-over-fist. Both companies have also taken substantial writedowns, with Tilray chopping off value from its Manitoba Harvest purchase, and HEXO wiping the slate clean on its Newstrike Brands buyout. To boot, HEXO is a delisting risk.

 

The most popular pot stocks are last in line to become profitable

Perhaps the biggest shock of all is that the two most popular marijuana stocks in Canada -- Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) -- are expected to be last among their peers to reach recurring profitability. Wall Street is looking for a very small per-share profit from both companies in fiscal 2024 (that's year-end Mar, 31, 2024 for Canopy and Jun. 30, 2024 for Aurora).

Even though Canopy Growth is the most cash-rich of all cannabis stocks, the company has been losing money at an extraordinary pace and making grossly overpriced acquisitions. Relatively new CEO David Klein has spent his first nine months on the job tightening Canopy's belt. Around 3 million square feet of licensed indoor cultivation space has been permanently closed, while share-based compensation has been (thankfully) slashed.

Meanwhile, Aurora Cannabis has been one of the industry's worst performers, with its share price down 96% since mid-March 2019. Aurora has shuttered five facilities, halted construction on two of its largest projects, sold another greenhouse, and taken billions of Canadian dollars in writedowns after grossly overpaying for its numerous acquisitions. Like Canopy, it's also trying to backpedal its way to profitability by slashing expenses. But unlike Canopy, Aurora Cannabis has been forced to lean on at-the-market stock offerings because of its ongoing cash burn.

Suffice it to say, Canopy Growth and Aurora Cannabis are two marijuana stocks that investors would be wise to avoid.