Medical cannabis fuels growth in Canopy, Cronos and Curaleaf

Despite the cannabis investment theme having gone up in smoke this year, US President Joe Biden’s cannabis reform could prove to be a boost for Canopy, Cronos and Curaleaf following their recent earnings reports.

– Medical cannabis a key driver for Canopy, Cronos and Curaleaf

– Canopy wants to “unleash the value of its full US cannabis ecosystem”

– Almost a third of the Roundhill Cannabis ETF is allocated to Cronos

Cannabis stocks Canopy [WEED.TO], Cronos [CRON.TO] and Curaleaf [CURLF] all reported earnings this week, sending shares in Canopy and Cronos higher on 10 November.

Canopy beat top line estimates but missed bottom line estimates. It reported a much wider loss of C$0.47 per share for Q2 2023 versus a loss C$0.03 per share in the year-ago quarter. Revenue fell 10% from C$131.4m to C$117.9m. According to analyst estimates compiled by FactSet, the consensus was for it to report a loss of C$0.27 on revenue of C$113.2m.

Cronos’ Q3 2022 revenue increased slightly year-over-year from $20.41m to $20.92m, while it matched its net loss of $0.07 reported in Q3 2021. The Zacks consensus estimate showed that analysts had expected the company to report a loss of $0.06.

Curaleaf improved its net loss slightly from $0.08 in Q3 2021 to $0.07, although missed the analyst consensus estimate of a loss of $0.03, which sent shares lower on 10 November. Revenue was up 7% year-over-year to $339.73m, just beating the $336.76m that analysts had expected, according to data from TipRanks.

Medical cannabis boosts revenue

Despite Canopy’s year-over-year revenue growth declining, it did note an 8% sequential growth in its Canadian medical cannabis segment as one of the quarter’s highlights. It also saw “stabilised revenues in Canadian adult-use”, while key brands, including Doja, Tweed and Deep Space, gained market share sequentially.

The primary drivers in Cronos’ net revenue were driven by “higher cannabis flower sales in the Israeli medical market and higher cannabis extract sales in the Canadian adult-use market”. The pot producer said in its earnings release that these drivers helped to partially offset a reduction in US revenue.

Curaleaf hailed the acquisition of a 55% stake in Four 20 Pharma GmbH, a licensed German producer and distributor of medical cannabis, as a quarterly highlight. Medical cannabis is expected to be legalised and regulated for adult-use in Germany by 2024.

Cannabis reform

Medical cannabis is currently fully-legal in thirty-nine states. More of the remaining 11 states could pass legislation in 2023 and 2024 following President Biden’s softening stance on marijuana reform.

While marijuana reform has the potential to be a tailwind for pot stocks, Cantor Fitzgerald analyst Pablo Zuanic believes marijuana reform could face headwinds.

“We would be less optimistic about SAFE Plus in the lame duck if the Republicans were to take both chambers,” Zuanic told Yahoo Finance. SAFE Plus refers to the banking act that will provide protection to financial institutions that provide services to cannabis companies.

Canopy announced towards the end of October that it was fast-tracking its entry into the US cannabis market – it hopes to set up a holding company that will enable it to “unleash the value of its full US cannabis ecosystem”. However, the Nasdaq is seemingly opposed to its entry to the US, as Bloomberg reported.

Funds in focus: Roundhill Cannabis ETF

Canopy is currently the second-biggest holding in the Global X Cannabis ETF [POTX], with a weighting of 9.85% as of 8 November. Cronos is the sixth-biggest and accounts for 7.35% of the portfolio. The fund is down 58.7% year-to-date and down 5.7% in the past week.

Canopy is the third-biggest holding in the Innovation Shares Cannabis ETF [THCX], with a weighting of 8.59%, while Cronos is the sixth-biggest, having been allocated 7.23% of the portfolio. The fund is down 66.3% year-to-date, and is trading down 4.6% in the past week.

Curaleaf makes up 32.98% of the Roundhill Cannabis ETF [WEED]. The fund is down 39.54% since launching on 20 April, but up 9.2% in the past week.