It's a sensitive time on the stock market these days with the coronavirus sending investors into a panic. That's bad news, especially for the cannabis industry where stocks are cratering to all-time lows. Many investments are down 60% or more. Exchange-traded funds (ETFs) are normally safer investments since they hold a variety of different stocks, and yet the Horizons Marijuana Life Sciences ETF is down 80% in just one year.
Things could get even worse, and the two stocks listed below could be in a world of trouble.
1. Aurora Cannabis
Aurora Cannabis (ACB -11.71%) is one of the worst-performing pot stocks over the past year, as it's fallen around 93% in just 12 months. From trading close to $10 per share a year ago, the stock now finds itself well below the $1 mark. A big problem for Aurora is that the company's fallen short of not just analyst expectations, but even its own projections.
When the company reported its fourth-quarter results on Sept. 11, its sales didn't meet the guidance Aurora issued earlier. It wasn't startling that Aurora missed -- it was that it had issued an update just a month earlier saying net revenue would fall between 100 million Canadian dollars and CA$107 million. But when Aurora reported earnings on Sept. 11, the actual number came in at CA$98.9 million. The company also expected its earnings before interest, taxes, depreciation, and amortization (EBITDA) would be positive by that quarter. Instead, the company reported an adjusted EBITDA loss of CA$11.7 million.
It wasn't just Q4 when Aurora disappointed investors. In the following two quarters, its sales fell to CA$75.2 million and then again to CA$56 million. Sales growth is a key reason investors have been willing to pay a premium for pot stocks in the past. And with the company now projecting "modest to no growth" in the upcoming quarter, the company isn't expecting a miraculous turnaround anytime soon. What makes the situation all the more challenging is the pot producer's lack of cash.
In the second quarter, Aurora reported having cash and cash equivalents totaling CA$156.3 million as of Dec. 31. And it could go through that in short order, given that over the past six months it burned through CA$229.6 million from its day-to-day operating activities. Investment bank Ello Capital projected last month that Aurora Cannabis may only have a couple of months of liquidity left and that its cash situation is among the worst in the industry.
As the coronavirus threatens to keep people home as the pandemic continues to spread, Aurora may generate even less revenue to cover its expenses. And while cannabis delivery is one option for consumers, Canada Post may not be of much help as it will no longer deliver products that require a signature, such as cannabis, to someone's door, and the recipient will need to sign for these packages at a post office. Cannabis stores remain open in many parts of the country, but it may not remain that way if the outbreak of COVID-19 becomes even worse in Canada and government officials impose lockdowns.
There's been an uptick in traffic of consumers stocking up on cannabis, but over the longer term, it's likely that sales may come to a halt in some parts of Canada if the spread of COVID-19 gets out of control. For Aurora, it creates a very sensitive situation where it could run out of money. And as challenging as 2020 has already been for the company, it's about to get even more difficult.
2. Cresco Labs
Cresco Labs (CURLF -1.96%) is in a better position than Aurora in terms of cash, but it's still facing many challenges as a result of the COVID-19 pandemic. The company released its third-quarter results on Nov. 26, which showed that as of Sept. 30, Cresco had cash and cash equivalents totaling $73.7 million. And over the past nine months, it only used $18.6 million to fund its day-to-day activities, suggesting it may be in okay shape for the foreseeable future.
But the spread of COVID-19 is much worse in the U.S. than it is in Canada, with the former now at well over 10,000 cases while the latter is still below 1,000. Those numbers may change rapidly, but California is already under a lockdown due to the severity of the coronavirus and more cities and states around the country may follow suit.
Regardless of how much money Cresco Labs has on hand or how little cash it's burned through, if sales take a hit, the losses will mount and the situation will get worse. The government may help struggling businesses, but there's no guarantee that there will be enough money to go around to help cannabis producers like Cresco to stave off dire circumstances.
The reality is that COVID-19 is such an uncertain situation that it's difficult to predict how it may affect cannabis companies. But one thing's for sure: The longer it drags out, the worse of a problem it'll be for cannabis companies. Cresco may be in a better position than Aurora for now, but that still shouldn't put investors at ease. Shares of Cresco are down 75% over the past year.
Takeaway for investors
Pot stocks like Cresco and Aurora may be down and cheaper than they've been in the past, but there's good reason for it -- there's a lot more risk in the industry as well. These companies are at serious risk today, and even if they're able to withstand and survive this adversity, their valuations may continue to take a beating in the process. And that's why, for now, investors may want to avoid investing in either of these two pot stocks today.