When the year began, hopes were incredibly high for the cannabis industry and marijuana stocks in general. Canada had just become the first industrialized country in the modern era to green-light the sale of recreational weed as of Oct. 2018, and we'd witnessed a number of U.S. states make the move toward marijuana legalization. As such, Wall Street's sales expectations for the pot industry were lofty.
But here we are, less than three weeks away from turning the page on 2019 and the decade, and cannabis stocks are a mess. A number of problems have, pardon the pun, cropped up throughout North America, and we've seen sales estimates for fiscal 2020 fall off of a cliff as a result.
Image source: Getty Images.
Cannabis stock sales estimates are tumbling
Back in mid-April, I went down the list, one by one, of the marijuana stocks I'd been following at the time, looking to see which companies would generate the most robust sales in 2020. According to Wall Street, these were the consensus estimates at the time (in U.S. dollars):
- Aurora Cannabis (ACB 3.11%): $642.8 million
- Aphria: $627.8 million
- Canopy Growth: $594.5 million
- Acreage Holdings: $525.1 million
- MedMen Enterprises: $470.3 million
- GW Pharmaceuticals: $429.8 million
- Tilray: $373.1 million
- The Green Organic Dutchman (TGODF +0.00%): $327.6 million
- Charlotte's Web (CWBHF +0.00%): $313.3 million
- HEXO (HEXO +0.00%): $239.7 million
- KushCo Holdings: $204.8 million
- Auxly Cannabis Group: $203 million
- OrganiGram Holdings: $175.9 million
- CannTrust: $142.9 million
- Cronos Group: $142.7 million
And, without changing the order in which they're listed, here are the consensus estimates for fiscal 2020 of these same 15 pot stocks today (again, in U.S. dollars):
- Aurora Cannabis: $305.6 million
- Aphria: $446 million
- Canopy Growth: $316.8 million
- Acreage Holdings: $361.8 million
- MedMen Enterprises: $240.6 million
- GW Pharmaceuticals: $559.04 million
- Tilray: $309.9 million
- The Green Organic Dutchman: $67.1 million
- Charlotte's Web: $149.2 million
- HEXO: $86.1 million
- KushCo Holdings: $226.7 million
- Auxly Cannabis Group: $47.2 million
- OrganiGram Holdings: $77.3 million
- CannTrust: N/A (cultivation and sales licenses suspended)
- Cronos Group: $86.8 million
Image source: Getty Images.
A few things you'll want to take note of
Here's a really interesting observation that demonstrates how badly sales estimates have collapsed. Among these 15 popular cannabis stocks, Wall Street was expecting a combined $5.41 billion in aggregate annual sales in fiscal 2020. According to the current estimates, taken just eight months after the previous projections, Wall Street is now looking for "only" $3.28 billion, combined. That's a 39% decline in overall sales expectations throughout North America in eight months.
As you'll note, some of these sales estimates really fell off a cliff. Aurora Cannabis, HEXO, and The Green Organic Dutchman, for instance, have seen their consensus estimates for 2020 fall by 52%, 64%, and 80%, respectively. I specifically mention these three pot stocks because they've all recently announced production cuts that are designed to better align their near-term production with a challenging market environment. Aurora is practically halving its peak production potential by idling construction at Aurora Nordic 2 in Denmark and the remainder of its construction at Aurora Sun in Alberta. Meanwhile, HEXO and The Green Organic Dutchman are looking to produce perhaps 80,000 kilos and 20,000 kilos to 22,000 kilos, respectively, in 2020, when their peak production potentials are actually 150,000 kilos and 219,000 kilos.
You can also see that it's not just Canadian stocks feeling the pinch. Cannabidiol (CBD) market share leader Charlotte's Web has seen its sales projections for next year cut by more than half over the past eight months, with vertically integrated multistate operators MedMen and Acreage Holdings also seeing sizable drop-offs in revenue expectations.
It's also worthwhile to point out that a select few marijuana stocks operating in the ancillary aspects of the industry have managed to improve their outlooks. CBD-focused drug developer GW Pharmaceuticals and vaporizer supplier/packaging solutions company KushCo have both seen their revenue forecasts climb since April.
Image source: Getty Images.
Why the heck are revenue forecasts plummeting for a clearly popular industry?
What you're probably wondering right now is how things could have gone so wrong, so fast for such a popular industry. After all, we see tens of billions of dollars change hands each year in the black market, so we know there's ample demand. The answer essentially boils down to a lack of precedence for a legal pot industry in the modern era.
In Canada, for example, regulation is the predominant issue, and it's been a problem on two fronts. For starters, Health Canada has done a relatively poor job of reviewing licensing applications and whittling away its enormous backlog. This had led to exceptionally long wait times by growers to plant or sell their product.
Additionally, the most populous province, Ontario, which is home to nearly two out of five Canadians, only had two dozen cannabis dispensaries open on the one-year anniversary of launching recreational weed sales. With so few legal channels available, consumers have had little choice but to turn to the black market. This slow-stepped rollout in Ontario is the primary reason Canadian growers Aurora Cannabis, HEXO, and Green Organic Dutchman are slashing production forecasts for the coming or current fiscal year.
Meanwhile, the United States is a mess mostly because of high tax rates. In California, consumers could be liable for an aggregate tax of perhaps 45% to 80%, depending on the locale and the number of supply chain costs being factored in. With legal cannabis unable to be even remotely competitive with black market weed on price, we've seen consumers turn to the black market.
However, the U.S. has also sported its fair share of health concerns. CBD sales are now in question after the U.S. Food and Drug Administration (FDA) provided a new consumer update in November that deems CBD as potentially harmful. The FDA's inability to come up with CBD food and beverage additive guidelines has been pushing Charlotte's Web's sales estimates lower for months, and this new consumer update won't help matters.
In short, the industry has a lot of growing up to do, and sales estimates could remain highly volatile for the foreseeable future.
