Industry Spotlight

Aurora, Canopy Growth, Tilray: Has COVID-19 lit up share prices?

During the COVID-19 pandemic, many share prices have gone to pot, except for pot itself, that is. What has driven the surge in Aurora [ACB], Canopy Growth [CGC] and Tilray’s [TLRY] share prices?

Cannabis companies Aurora, Canopy Growth and Tilray have seen share prices climb recently. Demand for cannabis has soared during the coronavirus pandemic as people have stocked up for both recreational and medicinal use during lockdown.

According to cannabis data intelligence firm Headset, there was a 64% leap in US pot sales in the week ending 16 March, helped by the drug being declared an “essential good” by a number of states, enabling cannabis companies to offer curbside deliveries. The drug has also been touted as a potential treatment for the coronavirus after a Canadian study showed that it may reduce the chances of a person becoming infected.

The sector has also seen an increased push in the US to enable banks to service legal cannabis businesses, thus increasing the flow of capital into the industry. Because cannabis is legal at a state, rather than federal level, large banks currently risk enforcement action if they work with cannabis firms, such as Aurora, Canopy Growth or Tilray.

Such positivity around the industry is very much welcome, given that the Cannabis ETF’s [THCX] price has plunged 55%, from its July 2019 launch price of $24.50 to $10.35 on 11 June.

55%

Price plunge of the Cannabis ETF between July 2019 and 11 June

The sentiment of those investors with a stake in companies like Aurora, Canopy Growth and Tilray’s share prices has been blown off course, as earnings announcements have fallen short and sales have been stifled by limited retail expansion. Distribution issues and growing concerns around the safety of vape cartridges have also been contributing to overall negativity.

Although forecasts point to a CAGR of 18.1% through to 2027 for the global legal cannabis market, the sector’s big names still have work to convince the wider market of long-term profitability.

 

Aurora’s share price

Aurora Cannabis’ share price fell from around $95 last June to just $5.80 in mid-May, partly over fears of its large debt pile of around C$246m.

Shares have since leapt to around $12.90 as of 11 June, helped by a recent earnings announcement that revealed third-quarter revenues of C$78.4m, up 18% on the previous quarter and beating analysts’ expectations of C$66.7m.

 

 

It recorded strong consumer and international medical cannabis sales, which were up 24% and 125% respectively.

It is also on the acquisition trail, buying US CBD firm Reliva for $40m. According to interim chief executive Michael Singer, the merger will create a “market-leading international cannabinoid platform that we believe can deliver robust revenue and profitable growth”.

But while things are starting to look rosier for the firm, there is still reason for caution.

“Aurora now has a higher bar to jump. And there are a lot of things that can go wrong. Retail cannabis stores in Canada might take longer to open than anticipated. Consumers could tighten their belts and spend less on recreational cannabis products. Any failure by Aurora will translate to a harder fall for its stock,” Keith Speights wrote in the Motley Fool.

“...there are a lot of things that can go wrong. Retail cannabis stores in Canada might take longer to open than anticipated. Consumers could tighten their belts and spend less on recreational cannabis products. Any failure by Aurora will translate to a harder fall for its stock” - Keith Speights

Canopy Growth’s share price

Meanwhile, Canopy Growth’s share price dropped from $41 last June to a low of $9.73 in mid-March. As of 11 June, it sits around the $16 level.

When it announced full-year results in May, it posted a loss of C$1.3b and disappointingly rowed back on forecasts that it would become profitable in 2022.

 

 

 

It suffered a 28% year-on-year drop in recreational sales in Canada for the quarter ending March 31 as a result of retail closures during the pandemic. It noted a decline in pre-rolled joints sales and raw cannabis, but growth in soft gels, oils and “Cannabis 2.0” products such as infused chocolates and beverages. Its international medical sales also grew by 10% year-on-year.

Jefferies analyst Owen Bennett said there was only a slim bullish case. “What really concerned us was commentary around needing to ‘understand what consumers want’. This is just basics,” he said.

Canopy, however, is bolstered by support from alcohol giant Constellation Brands and its conditional entry into the US market via its proposed purchase of multi-state operator Acreage Holdings.

“Sooner or later, the US will change its federal laws to allow the legal sale of marijuana. When that happens Canopy's relationship with Constellation will pay off in a significant way,” said Speights.

“Sooner or later, the US will change its federal laws to allow the legal sale of marijuana. When that happens Canopy's relationship with Constellation will pay off in a significant way” - Keith Speights

Tilray’s share price

Tilray’s share price plunged from an all-time high of $50.45 in mid-June 2019 to just $2.47 on 18 March as the market plunged on COVID-19 fears.

The price has since jumped to $8.37 (through 11 June), helped by the news on 12 May that its first-quarter revenues had soared 126% to $52m, beating analyst expectations. It was boosted by customers stockpiling product such as hemp foods as well as healthier overseas medical sales.

 

 

Despite its net loss of $184m, up from a loss of $29.4m a year ago, it’s hopeful that it can turn a profit by the end of this year,  reaching positive EBITDA by the end of this year by making the business more efficient and saving costs by closing facilities. It also expects sales demand to continue.

“COVID-19 may lead to a faster migration of Canadian consumers from the illicit market to the legal market,” said chief executive Brendan Kennedy on the earnings call.

Analysts, however, are not convinced that Tilray will become the market-leading firm. Cantor Fitzgerald analyst Pablo Zuanic has stated that it lags behind its peers in the Canadian recreational market.

 

Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.

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