Investors are becoming increasingly wary of cannabis stocks as the companies struggle with profitability. The ETFMG Alternative Harvest exchange-traded fund [MJ], for example, has seen its share price more than halve from its year-to-date high of $39.25 in March. Canopy Growth’s [CGC] stock, the largest cannabis company by market value according to The Wall Street Journal, is down by over 40% so far this year.
Cannabis stocks have gone from being the “hottest investment” on Wall Street to a “train wreck”, said Sean Williams of the Motley Fool.
Persistent supply issues, the lengthy process of sales license applications and the “slow rollout of physical dispensaries” are the main drags on company, Williams said. Health and governance concerns have also hit the sector. So, how have these issues affected cannabis companies’ stock prices?
Weak earnings kill the buzz
Aurora Cannabis’s [ACB] stock dropped from a year-to-date high of $10.32 in March to $2.73 at the end of trading on 15 November, the lowest since October 2017. It recently reported a fiscal first-quarter adjusted EBITDA loss of C$39.7m, wider than the $20.8m loss analysts had expected, and revenue of C$75.2m, which was below forecasts of C$90.6m.
Medical revenues rose by 3%, but Canadian consumer cannabis revenue dived by 33%, as it noted fewer orders from distributors working through worryingly unsold inventories.
Aurora said that although it “believes the global market opportunity for cannabis is robust, there is uncertainty in the timing of revenue ramp-up in our core markets, and we continue to invest in our global operations, which may result in near-term challenges to achieving positive adjusted EBITDA.”
Despite this, Aurora has halted construction of its Nordic 2 facility in Denmark and deferred most of the final construction on its Sun development.
Canopy Growth’s stock has fallen from a year-to-date high of $52.74 in April to $15.33 on 15 November. It posted a loss for the quarter ending 30 September of C$374.6m, compared with C$330.6m a year earlier. And, while the company’s revenues tripled to C$76.6m, they were below forecasts of C$90.6m. Canopy blamed a drop in selling prices of its cannabis oils and edibles due to declining consumer demand.
|Return on Equity (TTM)||-51.03%||-8.83%||-43.73%|
|Quarterly Revenue Growth (YoY)||228.40%||153.60%||379.40%|
Canopy Growth, Aurora & Tilray share price vitals, Yahoo Finance, 18 November 2019
Tilray stock tanks
Tilray’s [TLRY] stock slumped from a high of more than $100 in January to $19.93 at the end of trading on 15 November, putting the share price down by more than 70% so far this year. Tilray reported a wider-than-expected third-quarter net loss of $35.7m, compared with a loss of $18.7m a year earlier, while its average selling prices have halved.
“The increased net loss and adjusted EBITDA declines were primarily due to the increase in operating expenses related to growth initiatives, expansion of international teams, and the addition of Manitoba Harvest and Natura businesses,” Tilray said.
“The increased net loss and adjusted EBITDA declines were primarily due to the increase in operating expenses related to growth initiatives, expansion of international teams, and the addition of Manitoba Harvest and Natura businesses” - Tilray
Are the companies’ weak earnings just a blip in a young industry with strong growth fundamentals?
Canopy’s chief executive Mark Zekulin said it is experiencing “short-term headwinds in what is a brand-new industry and we will benefit in the coming year as the retail channel expands.”
Indeed, some analysts see a buying opportunity, citing long-term demand in North America as well as some countries in Europe and Latin America moving towards cannabis legalisation, either medicinal or recreational.
“The international market is only starting to get going,” said Rommel Dionisio of Compass Point Research & Trading.
Roy Bingham, of cannabis data firm BDS Analytics, expects the US cannabis market to reach $30bn in the next five years. “This is based upon actual assessment of how long it takes to roll out the stores and get the regulations approved,” he said. At present, according to New Frontier Data, total sales of legalised marijuana reached $10.4bn in the US in 2018.
Total sales of legalised marijuana in the US in 2018
As well as market growth potential cannabis stocks could be “excellent strategic fits for big tobacco” according to Jeffries analyst Owen Bennett said. He noted that tobacco companies “know how to cultivate crop and deal with regulators.”
Another positive for the sector could be the so-called Cannabis 2.0, and the legalisation of marijuana derivative products, including edibles, beverages, extracts and vape pens.
But Bill Peters, writing in Investor’s Business Daily, urges investors to be cautious.
“It's not clear which marijuana stocks will be longer-term winners. Investors could treat marijuana stocks like recent tech IPOs that are growing rapidly but still losing money. But difficulties continue to build up, and Wall Street is still searching for the bottom,” he said.
“It's not clear which marijuana stocks will be longer-term winners. Investors could treat marijuana stocks like recent tech IPOs that are growing rapidly but still losing money. But difficulties continue to build up, and Wall Street is still searching for the bottom” - Investor’s Business Daily Bill Peters
There are no marijuana stocks currently in a buy range, Peters noted. “Marijuana stocks are in terrible shape. They likely won't improve until there is some indication that the marijuana industry is curbing losses and boosting sales. More regulatory clarity also could be helpful. But investors have to have a high-risk tolerance and be ready to cut losses.”