Canadian cannabis companies are still in the honeymoon phase of what's been rapid early growth for the new recreational marijuana market in Canada. However, in 2020 that's going to change in a hurry, and it could be a whole lot more difficult for cannabis companies to impress investors with their growth numbers. That could be bad news after what's already been a tough 2019 for the industry. Here's why things could get worse next year.
Prior-year results won't give companies an easy sales number to beat
One of the problems that Canopy Growth (NYSE:CGC) has been hit with this year has been a lack of profitability. It's been a sore spot for the company, and it's also dragged down the results of its key investor, Constellation Brands. The mounting losses have been a contributing reason, if not the main one, for the dismissal of Bruce Linton, who had long been the leader for Canopy Growth and a respected figure in the industry.
But many investors have ignored the lack of profitability in the industry because companies are still experiencing tremendous growth. For instance, in its Q2 results for fiscal 2020, released back in November, Canopy Growth's sales of 76.6 million Canadian dollars were up a whopping 229% from the CA$23.3 million it had generated in the prior-year quarter.
However, it's not an apples-to-apples comparison because in the prior year the recreational market was not open in Canada, and so it was easy for the company to blow the comparative numbers out of the water. The recreational marijuana market opened for business in Canada on Oct. 17, 2018. And now that it's been more than a year since recreational pot has been legal, the upcoming quarterly results are going to have better prior-year numbers, and these significant growth rates will come down in a hurry.
In the company's Q3 results of fiscal 2019, which were released in February 2019, Canopy Growth's net revenue of CA$83 million was actually higher than net revenue earned this past quarter. The period didn't cover a full three months of the recreational market being open.
Whether it can beat these numbers when the company goes to report its earnings in February is going to be a big test for Canopy Growth. Other Canadian cannabis companies are going to be facing the same sorts of challenges.
Edibles should provide a boost
As for Canopy Growth, it should still come in ahead of prior-year results, as it will have the benefit of edibles and ingestible products, also known as the "Cannabis 2.0" market in Canada. The new cannabis products arrived on store shelves in December and will provide a new source of revenue for cannabis producers like Canopy Growth.
According to estimates Deloitte made in June, this new segment of the market could be worth CA$2.7 billion annually. That's nearly half of the near-CA$6 billion market size that Deloitte expects the recreational and medical market to be worth, which excludes the new products.
Canopy Growth's new products should help ensure that sales continue to grow. However, growth rates are unlikely to be as high as they've been in 2019, and that could put pressure on the stock.
What marijuana investors should watch out for
Canadian cannabis companies should continue to benefit in 2020 from a new segment of the market being open for business. But if there are any hiccups for edible or ingestible products, producing strong year-over-year sales growth numbers could be a big challenge.
And the problem for cannabis stocks is that with profitability being nowhere in sight for many companies, growth is all that investors will have to hang their hats on. If cannabis companies report sales numbers with only modest improvements from last year, that could lead to even more selling for pot stocks in 2020.
This past year has already been a tough one for marijuana stocks as the Horizons Marijuana Life Sciences ETF fell 40% in 2019 while Canopy Growth declined by 34%. As bad as the sell-off has been in the industry, it could get even worse in 2020.