Incredible growth opportunities in the stock market arguably come about just once or twice per generation. The legalization of marijuana in Canada this past October, and in more than three dozen countries around the world in recent years, just might be this generation's incredible growth story.
Last year, Arcview Market Research and BDS Analytics estimate that global weed sales totaled $12.2 billion. But by 2022, global pot sales are projected to hit $31.3 billion. That's a compound annual growth rate of nearly 27%, for those of you keeping score at home. Wall Street is looking even further out, with sales of $50 billion to $75 billion expected by the end of the next decade. That's a lot of revenue dollars, and clearly it means that some pot stocks are going to be successful.
Of course, future growth prospects aren't necessarily making things better for marijuana stock investors in the near term. A flurry of supply chain problems in Canada, some of which are tied to regulatory red tape, have kept cannabis off of dispensary store shelves. In fact, the January 2019 retail sales data published by Health Statistics shows that weed sales in cannabis stores fell by almost 5% from the sequential month of December.
Needless to say, with the Canadian pot industry tripping out of the gate, earnings expectations for some of the most popular pot stocks are on the decline.
Though it was one of the top-performing pot stocks in the first quarter, Cronos Group (CRON -0.88%) has seen a pretty significant decline in Wall Street's consensus earnings per share estimate in recent weeks. Having expected 6 cents Canadian (CA$0.06) in profit in 2019 and CA$0.15 in 2020, Wall Street now foresees a CA$0.02 loss in 2019 and just CA$0.10 per share in profit in 2020.
Why the change of heart? Part of the reason could be the completion of Altria's $1.8 billion equity investment in Cronos Group. When completed, this resulted in the issuance of new common stock. This means a greater number of outstanding shares for net income (or net losses) to be divided into. It certainly could explain the bulk of the fiscal 2020 reduction.
As for 2019, my belief is that Wall Street simply didn't like what it saw from Cronos Group's fourth-quarter report. Despite being the third-largest pot stock by market cap, Cronos delivered just $4.2 million in sales and spoke of numerous supply chain issues. As a reminder, this is a company with subpar production potential relative to its market cap, and with a relatively minimal overseas presence compared to its large peers. At 234 times forward earnings, it's looking very avoidable.
In terms of production, no marijuana stock tops Aurora Cannabis (ACB -3.62%), which is currently producing at an annualized run-rate of more than 150,000 kilos a year as of the end of March, and looks to be on track for 700,000 kilos at its peak in perhaps 2021 or 2022. But this future production isn't necessarily going to help Aurora in the near term.
According to Wall Street, Aurora went from being expected to generate CA$0.07 in profit per share in 2019, and CA$0.12 per share in 2020, two months ago, to a current estimate of a loss of CA$0.22 in 2019 and just CA$0.03 per share in profit in 2020.
Similar to Cronos Group, share-based dilution could be part of the problem. But unlike Cronos, Aurora has yet to land a brand-name partner. Rather, Aurora Cannabis has continually financed acquisitions by issuing shares of its own stock, recently pushing past 1 billion shares outstanding, up from just 16 million shares as recently as June 30, 2014. With more shares outstanding, it becomes tougher for the company to really deliver for its shareholders.
The other factor potentially playing a role here is that Aurora's enormous size also comes with huge initial infrastructure costs. Being the leading producer means having to complete construction on more than a dozen grow farms, as well as lay the groundwork via processing, distribution, partnerships, and so on, in domestic and overseas markets. Suffice it to say, a forward price-to-earnings ratio of 400 is probably not what investors had in mind.
Another marijuana stock getting little love from Wall Street after its most recent quarterly report is Tilray (TLRY).
Once a highflier, Tilray's share price is more than 80% below its all-time intraday high. Now, its earnings per share estimates are also falling like a rock. According to Wall Street, Tilray was slated to lose $0.31 per share in 2019 (note: Tilray reports in U.S dollars), but earn a profit of $0.17 per share in 2020. Now, following a dismal fourth-quarter, Wall Street is looking for a $0.68 loss in 2019 and a $0.04 loss in 2020.
One of the biggest issues for Tilray is that its production simply isn't up to par with its peers. Even Cronos Group has a shot at out-producing Tilray if it doesn't get its act together. At present, it has 850,000 square feet of domestic production capacity and around 250,000 square feet of overseas growing space. That might be good enough for 100,000 kilos of annual output, but that's not a lot for a company valued at $5.5 billion.
The other concern is that Tilray is completely shaking up its long-term business model. Having previously focused on Canada, CEO Brendan Kennedy noted during the conference call with analysts that his company would instead be investing in the U.S. hemp market and in Europe. Although these are indeed bigger opportunities than the Canadian weed market, a strategy shift just months after the recreational launch of marijuana in Canada is a head-scratcher.
The Green Organic Dutchman
Earnings estimates are also falling pretty quickly for production laggard The Green Organic Dutchman (TGOD.F 0.76%). Wall Street had been calling for a profit of CA$0.07 in 2019 and CA$0.27 per share in 2020 just two months ago. Today, Wall Street is forecasting a loss of CA$0.08 in 2019 and just a CA$0.14 per share profit in 2020.
The Green Organic Dutchman is probably one of the toughest stocks to get a bead on because it isn't even expected to begin recognizing bulk sales of cannabis until midyear. Meanwhile, the company's peers have been recognizing cannabis sales for, in some cases, many years. Being a top-five producer at peak capacity sounds great on paper, but it's fashionably late entrance isn't helping in the early going.
It's also possible that, in addition to supply chain constraints in Canada, The Green Organic Dutchman's lack of productivity since Canada legalized recreational marijuana has cost it valuable long-term supply contracts. Even with some provinces still in the process of building out their infrastructure and governance, it's reasonable to believe that The Green Organic Dutchman missed out on the low-hanging fruit by bringing its production to market so late.
Even the largest pot stock in the world by market cap isn't immune. Canopy Growth (CGC -5.96%), which has lost more than CA$400 million on an operating basis through the first nine months of fiscal 2019, was expected to lose CA$1.57 per share by Wall Street in fiscal 2019, and earn a profit of CA$0.08 per share in fiscal 2020, as recently as two months ago. Now, the Wall Street consensus includes a loss of CA$1.78 per share in fiscal 2019, and a loss of CA$0.26 in fiscal 2020.
Canopy Growth, which figures to be the second-largest peak producer at 500,000-plus kilos a year, has never been particularly focused on profitability. Rather, it's hell-bent on laying the infrastructure to reach new markets, as well as build its brands and diversify its product portfolio.
For example, Canopy Growth acquired hemp-research company ebbu late last year for about $330 million, then learned in January that it was granted a hemp production and processing license in New York State. The company plans to invest between $100 million and $150 million in this hemp processing facility to diversify its revenue stream, as well as lay the groundwork for if and when the U.S. federal government does legalize cannabis.
With Canopy Growth expected to spend liberally in the interim, big losses are very possible.