Despite the dip last year, the marijuana industry consists of excellent growth stocks that have the potential to flourish in the coming years. The U.S. cannabis companies, in particular, saw drastic revenue growth amid the ongoing pandemic. The ramp-up of state legalization also gave a boost to marijuana sales.
However, not all stocks are worth considering. Some of the Canadian companies continued to disappoint investors. Canada-based Aurora Cannabis (ACB +1.80%) and Cronos Group (CRON +0.37%) are two Canadian pot stocks that have very few chances to recover this year. Here are the reasons you should avoid these two stocks in 2022.
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Aurora Cannabis shows no sign of recovery
After multiple instances of missing positive earnings before interest, tax, depreciation, and amortization (EBITDA) targets, it is hard to predict when Aurora will be able to recover. Its recent first-quarter results ended Sept. 30 showed no sign of hope either. Total revenue for the first quarter declined 11% year over year to 60 million Canadian dollars. There was a huge dip in consumer cannabis revenue of 44% to CA$19 million from the year-ago period.
Aurora still hasn't made any developments toward introducing more derivatives into the market (besides the few it launched in December 2019), which is why I believe its recreational segment isn't getting any revenue boost. Derivatives such as vapes, edibles, and beverages were launched in Canada in October 2019 as part of "Cannabis 2.0" legalization. A research report by Deloitte estimated Canada's cannabis derivatives market could be worth more than CA$2 billion annually. Unfortunately, Aurora is taking no steps to take advantage of this burgeoning market.
This downward trend in revenue caused another quarter of adjusted EBITDA losses of CA$12 million. Although EBITDA losses were lower versus the year-ago period, the company is nowhere close to reporting positive EBITDA as it assured at the beginning of 2021.
After missing its EBITDA targets frequently, Aurora had stopped making promises. But in its recent quarterly results, management again assured that it would be EBITDA positive by the first half of fiscal 2023. It is hard to put faith in a company that cannot keep its promises. Aurora did make investors rich at one point in time; its stock price rose by as much as 2,400% through early 2018.
Will that happen again? It is hard to say given that competition has increased and there are much better pot companies now.
Cronos has a lot of uncertainties to deal with now
After going public in 2017, Cronos' share price also shot up and gained close to 2,000%. U.S. tobacco company Altria Group's investment to own a 45% stake in the company in 2018 sparked high hopes. However, Cronos' performance over the last two years hasn't been impressive. The company is not profitable yet.
Recently, the company announced in an SEC filing that it will have to reinstate its financial statements for the second quarter (ended June 30), as it missed including an impairment charge of at least $220 million for the period related to "goodwill and indefinite-lived intangible assets in its U.S. reporting unit." To add to the worry, the company's delay in reporting its third-quarter 2021 (ended Sept. 30) results is causing more havoc for its stock price. Cronos also stated in the filing that the second-quarter financial statements "should no longer be relied on."
In its first-quarter 2021 results (ended March 31), the company did grow revenue 50% year over year to $12.6 million. The company credited this growth to a rise in recreational cannabis sales and medical cannabis sales in Israel. However, the revenue wasn't sufficient to bring in profits. It recorded another quarter of EBITDA loss of $37 million. The company ended the first quarter with $1.2 billion in cash and short-term investments.
No sign of hope for now for both pot stocks
Aurora does have a stable cash balance of CA$424 million, but it is only because it managed to raise capital by issuing new stock, causing excessive share dilution. Heavy stock dilution is not often a sign of a strong company and doesn't sit well with investors. Meanwhile, until Cronos reports its third-quarter results (that was due in November), it is hard to get investors' trust back for this company. Aurora and Cronos's stock lost 31% and 43%, respectively, last year compared to the industry benchmark the Horizons Marijuana Life Sciences ETF's fall of 17%.
The continuous disappointment forces me to believe that it could be a few years before these two companies can rebound. I would advise investors to steer clear of Aurora and Cronos for now. Meanwhile, investors interested in this cannabis sector should look at profitable U.S. cannabis stocks instead.
