What happened
Wednesday arrived with a rush of news for investors in the cannabis industry -- little of it good. In rapid succession, marijuana producer Aurora Cannabis (ACB -6.11%) first saw its price target raised, then announced a big issuance and sale of stock, and then got its price target cut (along with its stock rating). Soon after, rival cannabis company Tilray (TLRY) was also downgraded. And, as bad news continued to flood the industry, tiny HEXO (HEXO) found it impossible to fight the tide.
Result: As of 10 a.m. EST, all three stocks are down significantly -- Hexo shares by 4.4%, Tilray by 9.6%, and Aurora Cannabis worst of all -- a staggering 20.1% loss.
Image source: Getty Images.
So what
Most of today's news concerns Aurora Cannabis, so let's begin with that one -- and we'll begin on a happy note. Aurora Cannabis stock got pummeled (along with most marijuana stocks) yesterday after reporting disappointing sales and a big net loss. On Wall Street, however, analysts were in a forgiving mood, and at least two big investment banks, Canaccord Genuity and CIBC Capital Markets, took the opportunity to raise their price targets on the stock (to CA$11 and CA$15, respectively).
That, as I say, is the good news. The bad news is that no sooner had these analysts put their reputations on the line defending Aurora than the company announced it will sell about 16.7 million new shares at $7.50 apiece in an effort to raise $125 million in new cash. Then this morning, Aurora upped the size of that stock offering to 20 million shares to raise $150 million instead.
Analysts at Stifel Nicolaus promptly responded by downgrading Aurora Cannabis stock to a sell, albeit with an improved price target of CA$6.50 to account for the stock's recent run-up. Stifel explained, in a note covered on TheFly.com, that Aurora appears to be suffering from increased competition in Canada and that its need for cash (Aurora burnt through $93 million last quarter) is becoming more urgent, which is why the analyst is not optimistic about the stock.
Stifel next turned its guns upon Tilray, which like Aurora suffered a sales shortfall in its most recent earnings report -- and, also like Aurora, lost money and burned cash. Stifel now thinks this one is also a sell, cutting its price target on Tilray to $4.75 and again citing cash burn as a primary concern.
Now what
What about HEXO? The good news here is that no one seems to have downgraded it (not today, at least). But the bad news is that the company is hardly out of the woods, nor is it immune from the pessimism infecting the larger cannabis players.
Last quarter's earnings news was simply awful, with HEXO losing $0.38 per share instead of the projected $0.03. Indeed, over the past year, HEXO has racked up losses of $420 million -- more than the company's own market capitalization. Free cash flow for the period stands at negative $152 million, and if that continues, then investors have to assume that cash will soon be as much of a concern for HEXO as it already is for Aurora Cannabis and Tilray.
So what's the upshot for investors? They've already lost 60% of their investment in shares of Tilray and HEXO, and 80% in Aurora, over the past year -- but things could still get worse. It's bad news all around for marijuana stocks, and I'm not at all convinced that even marijuana legalization can save investors from their losses.
