What happened

After soaring in late trading Thursday, Canadian pot stocks Tilray Brands (TLRY -2.85%), Canopy Growth (CGC -1.94%), and Aurora Cannabis (ACB -2.03%) are plunging Friday. As of 11:20 a.m. ET, Tilray shares were down 15.8%, Canopy was down 17.8%, and Aurora stock dropped 12%. 

So what

Cannabis stocks took off Thursday after President Joe Biden announced he was pardoning thousands of people who had federal convictions for simple marijuana possession, and -- perhaps more importantly -- said he had initiated a government review on how the drug is classified. Marijuana is currently classified as a Schedule 1 drug. That's the same level as heroin, and a higher level than fentanyl  or methamphetamine. A reclassification could potentially allow Canadian marijuana companies to enter the U.S. market. 

marijuana user smiling smoking a joint.

Image source: Getty Images.

In August, Tilray CEO Irwin Simon told Yahoo Finance that he believes federal legalization in the U.S. would open up a $100 billion opportunity for Canadian growers. But after investors digested the news from Thursday, some decided to take profits Friday. Tilray also likely didn't boost short-term bullish sentiment when it reported its fiscal 2023 first-quarter results Friday morning: It missed analysts' estimates on both the top and bottom lines. Even with Friday morning's drop, however, Tilray was still up 19% for the week as of this writing.

Now what

Tilray reported revenue of $153.2 million and a net loss of $0.13 per share for its fiscal Q1, which ended Aug. 31. Analysts had expected revenue of about $156 million and a loss of $0.07 per share. The company said it was continuing to work on cost savings initiatives and believes it is still positioned to hit its previous guidance for adjusted EBITDA in the $70 million to $80 million range this fiscal year. It also confirmed it believes it will be free cash flow positive in its operating business units for the year. 

The news from Washington is still holding investors' attention Friday, even if cannabis stocks have given back some of their gains. Tilray and Canopy have both been working to establish frameworks of businesses in the U.S. in anticipation of potential full federal legalization. Tilray owns craft brewer SweetWater Brewing, Breckenridge Distillery, and hemp products company Manitoba Harvest in the U.S. It says those brands are profitable in their own rights, but they could also serve as valuable infrastructure for its cannabis sales operations in the future. 

Canopy Growth also has an ecosystem already operating in the United States. Its Acreage Holdings and Wana brands participate in the recreational cannabis market in states that have legalized marijuana for adult use, and are expanding across North America. 

All the Canadian growers would love to see federal legalization occur. The spikes in their share prices after President Biden's actions show how much investors believe that opening up the U.S. market could be a game changer for those companies. There is still not a clear path in Washington for that to happen, however.