About a year ago, Aurora Cannabis (ACB 18.15%) was trading as high as $12.52 a share, a sobering reminder for investors of how far the stock has fallen since then. Today, Aurora's stock is less than one-third of that price. But it isn't alone; since legalization took place in Canada last October, marijuana stocks have plummeted in value. While it may be tempting to buy the stocks at their reduced prices, investors may want to hold off, as things could get worse before they get better.
Disappointing sales numbers could lead to further declines
What drove the industry to the heights it reached last year was the promises of growth and all the potential that there was in the market. However, with the Canadian market having an estimated market size of $5.2 billion in five years and the U.S. still being off limits (besides hemp), the opportunity simply doesn't look that big. And that's even more obvious when you consider that even with Aurora's stock crashing as much as it has over the past year, it's still valued at more than $4.2 billion.
While the company does have a large international presence, many of those markets are still in their very early growth stages. Make no mistake -- the success of the Canadian market is going to be key for Aurora and other pot stocks to be able to achieve their lofty expectations. After Aurora disappointed investors with its fourth-quarter results, Chairman Michael Singer told BNN Bloomberg that having more retail pot shops in Canada is going to be critical to the company being able to achieve a positive earnings before interest, taxes, depreciation, and amortization (EBITDA) figure.
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However, that's assuming sales will also continue to grow at a high rate, and according to analysts from the CIBC (Canadian Imperial Bank of Commerce) the sales numbers that the cannabis industry is expecting for the next few years are simply unrealistic. The analysts see sales for cannabis producers reaching $2.2 billion Canadian dollars in 2020 and just CA$3.3 billion the year after that.
If that turns out to be the case, that could not only jeopardize Aurora's ability to generate positive EBITDA, but its ability to meet its own sales targets as well, which has not been a given at this point.
Key takeaways for investors
One of the challenges with the cannabis industry thus far has been in estimating just how much sales it will achieve. This year, producers like Aurora have been able to smash last year's sales numbers because the recreational market wasn't open back then. And in 2020, they'll also benefit from derivative sales, which should commence in December and should give those figures a boost as well.
There's going to be a lot of pressure on companies to continue growing sales while also focusing more on profitability, and if there's a softness in either the sale of edibles or existing products, there could be even more of a sell-off of cannabis stocks.
