Why are Aurora, Cronos and Tilray share prices struggling?

Cannabis stocks such as Cronos, Tilray and Aurora have taken a huge beating this year, dragged down by slow progress on US legalisation. But even if legislation is passed, there are other headwinds to be wary of.

Cannabis stocks including Aurora Cannabis [ACB], Cronos [CRON.TO] and Tilray [TLRY] have been smoked this year. The Cannabis ETF [THCX], which holds all three stocks, is down 60.2% since the start of the year as of 6 September.

Although the fund is down 11.7% in the past month, hopes that the US Senate will soon pass the federal banking reform bill, which would support cannabis business banking, could stoke a tailwind. Cannabis stocks rallied temporarily at the end of August, in tandem with meme stocks like Bed, Bath and Beyond [BBBY].

Pittsburgh Senate candidate John Fetterman met with President Joe Biden on Labour Day on 5 September in a bid to push forward discussion on cannabis legalisation. Cannabis stocks didn't react to this when North America markets opened for the week on 6 September, but if Fetterman is successful in encouraging Biden to accelerate legalisation, then this could lead to long-term growth.

Aurora sees revenue slump

The Aurora share price has collapsed 74.5% since the turn of 2022 and is down 8% in the past month through 6 September.

The Canadian producer and distributor’s consumer cannabis revenue declined from $19.1m in Q1 to $14.8m in Q2. Notably, however, its international revenue increased 24% from the previous quarter, boosted by its medical cannabis business. “New international markets are rapidly opening, and… we see a significant revenue opportunity of which we are at the forefront,” CEO Miguel Martin said on the earnings call.

However, with continued pressure for the consumer cannabis market, analysts remain uncertain on the company’s outlook. ATB Capital Markets analyst Frederico Gomes reiterated an ‘underperform’ rating in June, according to a note seen by cannabis industry publication CanTech Letter.

Though Gomes favours Aurora’s “robust capital position relative to other Canadian [licensed producers]” and its focus on profitability, he believes the near-term outlook could be challenging due to “lacklustre recreational sales, lumpy international sales and a shrinking Canadian medical cannabis market”.

Cronos’ Q2 earnings underwhelm

The Cronos share price is down 24.1% year-to-date and 14.5% in the past month. The company reported a 48% year-over-year increase in net revenue of $23.1m for the second quarter ending 30 June.

Analysts polled by Zacks Investment Research had been expecting $27.7m. While US revenue fell 34%, sales from its other global markets grew 61% year-over-year, highlighting that the company still has strong revenue streams even if US legislation continues to stall.

Last month, Jefferies analyst Owen Bennett cut his full-year revenue expectations for Cronos from $115.6m to $94.9m, according to a note to clients seen by MarketWatch. Bennett maintained a neutral rating on the stock, but stressed that it had nothing to do with the “current operations runway”. He blamed the company’s long-standing partnership with tobacco giant Altria [MO].

Tilray could get Germany boost

The Tilray share price has been hit harder than most, dropping 56.4% year-to-date and 18.7% in the past month. The company acquired medical cannabis firm Aphria in May last year, but the 76.7% drop in the past 52 weeks will have disappointed Aphria investors who thought they were getting a good deal.

The messy situation could leave Tilray exposed to a lawsuit regarding accusations of misleading investors over assets that were acquired, according to a Bloomberg Law report on 31 August.

Cantor Fitzgerald analyst Pablo Zuanic has named Tilray, along with Aurora, as a stock that stands to benefit from the legalisation of cannabis use in Germany. “With uncertainty on the reform outlook for cannabis in the US, we suggest investors pay attention to Germany, as legalisation there could result in significant upside for a few Nasdaq-listed cannabis stocks,” Zuanic wrote in a note to clients seen by MarketWatch at the end of last month.