The year began promisingly for the marijuana industry, with more than a dozen cannabis stocks galloping higher by at least 70% during the first quarter, and the Horizons Marijuana Life Sciences ETF, the first cannabis-focused exchange-traded fund, gaining 50%. With Canada having commenced the sale of recreational weed in October 2018, and derivative pot products presumed to hit dispensary shelves by no later than October 2019, the gauntlet was set for pot stocks to thrive.

But as we near the close of the year, the reality is that these marijuana stock gains have gone up in smoke... and then some. At one point, around $40 billion in market cap value was lost between the end of March and early December, with a vast majority of cannabis stock shedding a double-digit percentage.

A person using a pin to pop a bubble with a dollar sign inside of it.

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Tilray's stock falls below its IPO list price

Perhaps no marijuana stock has served as a greater disappointment than Tilray (NASDAQ:TLRY), which as of last week has now come full circle since its July 2018 initial public offering.

As a refresher, Tilray debuted on the Nasdaq exchange 17 months ago with a list price of $17 a share. However, after spending about a month in the $20s, Tilray's shares took off between mid-August and mid-September last year, ultimately hitting $300 on the nose on an intraday basis. It was truly reminiscent of the dot-com era days. And just like the dot-com boom, there came a most resounding bust.

Since 2019 began, Tilray has seen its share price collapse by 74%, with billions of dollars in market cap erased. More importantly, the company's shares hit an all-time intraday low last week of $16.92, marking a complete retracement of the gains experienced over the past 17 months.

How on earth could things go so wrong, so fast for what once was one of the hottest stocks on in the cannabis space? Let's take a closer look.

A cannabis bud and small vial of cannabinoid-rich liquid next to a Canadian flag.

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Here's why Tilray has been such a disaster of an investment

To begin with, the regulatory environment in Canada hasn't exactly set growers up for success. Regulatory agency Health Canada has struggled to work through an enormous backlog of cultivation, processing, and sales license applications, while Ontario has slow-stepped the licensing of physical dispensaries. Put plainly, there just aren't enough avenues for legal growers like Tilray to get their product in front of consumers. As a result, supply bottlenecks have developed in Ontario, and the black market continues to thrive.

Another clear problem for Tilray is the company's clear lack of production. Having entered the adult-use scene a little later than its peers, Tilray has been stuck purchasing wholesale cannabis in recent quarters in order to meet supply agreements and expand its product portfolio. The issue is that buying wholesale cannabis is crushing Tilray's margins. This is especially worrisome considering that dried cannabis flower prices have begun to decline in Canada, and Tilray's margins are already being negatively impacted by its acquisition of hemp foods company Manitoba Harvest. Don't get me wrong, Manitoba Harvest offers a valuable distribution network throughout North America that Tilray can use to offer cannabidiol (CBD) products. However, hemp foods are, in general, a lower-margin product than cannabis, and thus a drag on Tilray's margins.

There are also concerns about the direction management is taking the company. As some of you may recall, Tilray CEO Brendan Kennedy announced in March that the company would be de-emphasizing Canadian investment in favor of expanding into the U.S. and Europe. While these are lucrative foreign markets, it's an odd decision to have made with Canada having recently launched adult-use weed sales and Tilray being a prominent name in the medical marijuana space.

A visibly frustrated businessman holding his hands up while looking at material on his laptop.

Image source: Getty Images.

Wall Street may also be factoring in the downstream merger with private equity firm Privateer Holdings, announced in June. Privateer owns 75 million shares of Tilray (about 77% of its outstanding share count), and the concern has always been that when Privateer began selling down its stake, Tilray's stock would crater. The acquisition of Privateer removed the idea of a surprising share dump, but it still puts in motion the planned sale of a majority of the company's shares (in an orderly fashion) over a two-year period. That's liable to continue pressuring Tilray's stock.

Investors also can't overlook Tilray's inability to make progress in the profit column. In fact, with the company essentially resetting its strategy in March by de-emphasizing Canada, it pushed any shot of recurring profitability out to 2021, or more than likely 2022. Through the first nine months of 2019, Tilray's general and administrative expenses have tripled from the prior-year period, with the company reporting an operating loss of $83.7 million.

Lastly, Tilray's extensive history of losses and its poor operating margins (thus far) have investors genuinely concerned about the company's cash position. Tilray ended the third quarter with $100.2 million in cash and $22.2 million in short-term investments. On a combined basis, this $122.4 million is way down from the $517.6 million in cash, cash equivalents, and short-term investments in began the year with. It's no secret that nondilutive forms of financing are hard to come by right now for pot stocks, which makes Tilray's significant decline in cash all the more worrisome with losses ongoing. 

Tilray might be a brand-name pot stock with a storied history, but it's not a company investors should want anywhere near their portfolio moving forward.