The cannabis industry must be in the running for the worst-performing industry for the past 12 months. Even major names, such as Aurora Cannabis (ACB -2.54%) and Cronos Group (CRON 1.22%), haven't escaped the bloodbath. Moreover, both pot growers face severe (and somewhat similar) issues that make it hard to justify purchasing their shares today. Here is why investors should stay far away from Aurora Cannabis and Cronos Group, at least for now.
1. Aurora Cannabis
Aurora Cannabis is one of the largest pot growers in Canada by market cap, and it also has operations in various other countries worldwide, including Germany and Australia. One of the company's key issues is that it faces stiff competition in the Canadian cannabis market. This isn't surprising: Canada famously legalized recreational adult use of the substance in late 2018, inviting plenty of players to benefit from this potential gold mine.
But there have been challenges. For instance, illegal avenues to purchase cannabis remain, and that's eating into the revenue that could be going to Aurora Cannabis. That's despite the hundreds of millions of dollars the pot grower has invested in its attempt to dominate the market.
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This partly explains why the company continues to record net losses. During its fiscal year 2022, which ended on June 30, Aurora Cannabis reported a net loss of 1.7 billion Canadian dollars, which is substantially worse than the net loss of CA$695.1 million reported during the previous fiscal year.
If Aurora Cannabis' revenue has been growing steadily, perhaps it would be worth ignoring the red ink on the bottom line. But that's not the case; the company's revenue growth rates have dropped substantially lately.
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During its latest fiscal year, Aurora Cannabis' net revenue declined to CA$221.3 million, down from the CA$245.3 million reported during the previous fiscal year.
The company is seeking to improve its financials, notably by decreasing expenses and delivering profits. Management has reiterated its intention to become profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by the end of the year.
That's a great goal, but EBITDA profitability isn't the same as full-blown profitability. Further, with the company's revenue growth still under pressure, there is no telling when Aurora Cannabis will be able to achieve this goal of posting green on the bottom line regularly.
Here's one more problem: Aurora Cannabis became notorious for diluting existing shareholders through various cash-raising measures. The company's average diluted outstanding shares have risen much faster than some of its similarly sized peers in the Canadian cannabis market.
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These companies faced difficulties raising funds due to the nature of their business activities, so it isn't surprising that they relied on dilutive forms of financing. But Aurora Cannabis overdid it, and it has little to show for it. With all of these problems the company faces, it is best to stay far away until it shows that it has turned things around.
2. Cronos Group
Cronos Group had some advantages over its peers in the Canadian cannabis market. Most notably, the company attracted a lucrative investment from Altria. The producer and retailer of tobacco and related products poured $1.8 billion into Cronos Group in 2019, becoming its largest shareholder.
With the financial backing of Altria, Cronos Group could avoid the funding issues that had plagued many of its competitors. It also could use Altria's vast retail footprints to its advantage. Despite Altria's investment, Cronos Group's results haven't been what investors had hoped, and that has been evident in the company's stock market performance.
Cronos Group does not record revenue on par with its similarly sized Canadian peers.
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Cronos Group is looking to improve its results with a series of initiatives. For instance, it is still launching new products to increase revenue. During the second quarter, the company released gummy and vape cannabis products. But the issues pervasive in the Canadian cannabis market will impact Cronos Group too.
At the very least, investors should wait to see how things work out with the company's new portfolio before rushing to buy shares. Cronos Group is also seeking to improve its bottom line. In the second quarter, the pot grower reported a net loss per share of $0.05, which was better than the loss per share of $0.48 reported during the year-ago period.
Cronos Group plans to reduce expenses, particularly those related to some of its operations in the U.S. Those may all be steps in the right direction, but I'd advise against buying shares of Cronos Group at least until it shows consistent profitability. In the meantime, investors would do well to watch from the sidelines.
