It's no secret that cannabis is expected to be one of the hottest growth trends over the next decade. Following the legalization of adult-use marijuana last October in Canada, and the steady push toward legalization in select U.S. states, worldwide weed sales have more than tripled over the past four years, through 2018. And according to the State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics, global sales could quadruple by the time 2024 rolls around.
Unfortunately, these long-term growth projections haven't been enough to buoy cannabis stock valuations of late. Over the past six months, a number of brand-name pot stocks have seen half or more of their market cap disappear.
Consensus sales estimates for 2020 are plummeting for brand-name pot stocks
And valuations aren't the only thing that's gone up in smoke of late. A look back at Wall Street's consensus 2020 sales estimates for a number of top marijuana stocks as of mid-April, versus where they are now, reveals a significant deterioration in expectations. This revenue decline is especially notable for Canada's marijuana kingpins: Canopy Growth (NASDAQ:CGC), Aurora Cannabis (NASDAQ:ACB), and Cronos Group (NASDAQ:CRON).
Back in mid-April, Wall Street's consensus sales estimate for fiscal 2020 (not to be confused with calendar year 2020) for each of these companies were as follows (in U.S. dollars):
- Canopy Growth: $594.5 million
- Aurora Cannabis: $642.8 million
- Cronos Group: $142.7 million
And here's a look at where things stood as of the second week of October:
- Canopy Growth: $466.8 million
- Aurora Cannabis: $436.6 million
- Cronos Group: $110 million
For those of you keeping score at home, over the past six months we've witnessed a reduction in estimated fiscal 2020 sales of 21%, 32%, and 23%, respectively, for Canopy Growth, Aurora Cannabis, and Cronos Group. Mind you, these three pot stocks are the face of the Canadian marijuana industry, as evidenced by their billion-dollar market caps.
Three reasons Aurora, Canopy, and Cronos have lost their mojo
How have things gone so wrong, so fast for the budding marijuana industry? Let's take a closer look.
1. Canadian supply issues aren't an easy fix
Seasoned cannabis stock investors are probably sick and tired of hearing about supply shortages in Canada, but the fact remains that we're a week shy of the one-year anniversary of adult-use sales commencing in our neighbor to the north, and shortages of product are still ongoing.
There are several factors at play that have stymied the ability of growers to bring product to market. Regulatory agency Health Canada has been buried in cultivation and sales license applications, while individual provinces have, at times, been slow to approve the licenses of dispensaries. Even growers take part of the blame for starting cultivation projects that won't be complete until sometime in 2020. Add all of this up, and you have the recipe for persistent supply shortages throughout Canada.
But here's the thing: Even with Health Canada implementing changes to the licensing application process, and growers nearing completion for a number of cultivation projects, it's unlikely that supply issues are going to be resolved with the flip of a switch. Rather, a more likely scenario is that it takes many quarters for Health Canada to work through its application backlog. This means continued shortages of existing product, as well as marijuana derivatives, which will first hit dispensary shelves in mid-December.
2. Operating results, sans one-time benefits, haven't been pretty
As you can probably imagine, persistent supply shortages have led to some hideous operating results for marijuana stocks almost across the board. Canopy Growth lost more than 1 billion Canadian dollars in its fiscal first-quarter results, although much of this was the result of a one-time charge tied to the extinguishment of warrants. Even so, backing out one-time benefits and costs left Canopy Growth with a relatively small CA$13.2 million gross profit and operating expenses of CA$229.2 million.
It's the same story for Aurora Cannabis, which recently reported its fiscal 2019 full-year results. Despite a gross profit before fair-value adjustments of CA$135.4 million for fiscal 2019, operating expenses soared to CA$474.1 million, up more than threefold from the prior-year period.
Cronos, meanwhile, has generated a surprise profit in two consecutive quarters, although this is entirely due to the revaluation of derivative liabilities (i.e., warrants tied to its equity investment from Altria). If investors were to break out one-time benefits and costs, they'd see a company that's still losing quite a bit of money on an operating basis.
3. Dilution has begun taking its toll
It's safe to say that pot stock investors have also become intolerant of companies that continually dilute them.
Prior to the passage of the Cannabis Act in Canada, access to basic banking services for pot companies was practically nonexistent. In order to fund capacity expansion, marketing efforts, brand-building, acquisitions, and so on, most cannabis stocks turned to share offerings or convertible debentures to raise capital. While effective at raising money, these offerings usually came at a cost to long-term shareholders by diluting the value of their existing holdings.
Aurora Cannabis, for example, has seen its share count increase by 1 billion (yes, with a "b") over the past five years. Over that time, Aurora has purchased more than a dozen companies, as well as financed the buildout of numerous organic projects, including the soon-to-be-completed Aurora Sun grow farm in Alberta that'll span 1.62 million square feet and produce at least 230,000 kilos per year. But while Aurora's market cap has risen, its share price has declined as a result of the company's persistent use of its common stock to finance deals.
And don't forget, as outstanding share counts rise, it makes it that much harder for pot stocks to generate a meaningful earnings-per-share figure.
It's unclear when marijuana's brand-name companies will get their mojo back. In the meantime, expect sales forecasts for these companies to continue to decline.