The stock market moved lower on Friday, although most indexes managed to come off their lows from earlier in the session. Investors seem to be taking a pause after a sharp rally that has led some to declare the end of the bear market that started in 2022.
The current AI stock craze has been a leading contributor to the broader market's strong performance in 2023. Yet former popular investment trends haven't always panned out very well. Indeed, today's drops in Virgin Galactic Holdings (SPCE 3.15%) and Canopy Growth (CGC 2.41%) show how many investors in special purpose acquisition companies (SPACs) and marijuana stocks didn't get the huge returns they'd hoped to achieve.
Virgin Galactic looks to raise capital
Shares of Virgin Galactic Holdings were down 16% in early-afternoon trading on Friday. The former special purpose acquisition company and space tourism specialist gave back recent gains as it announced plans to raise substantial amounts of capital to fund its growth.
Virgin Galactic entered into a new distribution agency agreement with three different Wall Street investment banking firms to underwrite up to $400 million in secondary stock offerings in the future, according to a filing with the U.S. Securities and Exchange Commission. The space tourism company said that it intends to use proceeds of any future sales to develop its space fleet, along with the infrastructure to support its commercial operations.
The new agreement comes after Virgin Galactic sold all the shares available under a similar agreement from August 2022. The company reported having sold 37.4 million to generate $164.6 million in gross proceeds between March 31 and the date of the SEC filing. That works out to just $4.40 per share, which is considerably lower than where the stock traded at the close of business on Thursday.
Virgin Galactic came public through a SPAC merger in late 2019, and its early success helped to spark immense interest in the vehicles. After having soared into the high $40s, however, its stock has fallen roughly 90% from its highs, and it'll be tough for Virgin Galactic to return to better levels as long as it has to sell new shares to generate capital.
Canopy falls to new lows
Shares of Canopy Growth fell sharply on Friday, losing 13%. The move sent the marijuana stock to new all-time lows on U.S. stock exchanges, as Canopy's fiscal fourth-quarter financial results for the period ended March 31 showed ongoing struggles.
Canopy's financials continued to point to the weakness of the cannabis industry. Revenue dropped 14% year over year to 88 million Canadian dollars, as divestitures of its Canadian business-to-consumer unit combined with organic sales declines to send its top line lower. Net losses ballooned to CA$648 million, and negative free cash flow weighed in at CA$143 million.
Canopy tried to frame the results as part of a broader transformation to move to an asset-light business model. It highlighted cost reductions that it has implemented and believes that it remains on track to realize more savings in the future.
Canopy certainly isn't the only cannabis stock to feel the pinch of intense competition and continued delays in opening the broader U.S. market to legal consumer recreational use nationwide. Yet the steep drops in just about every pot stock serve as a reminder that promising industries can fall short of their potential.
None of this is to say that AI stocks are doomed to failure. However, many of those individual stocks have risen more on hype than on substance, and investors who can't discriminate among companies in the space could meet the same fate as investors in Virgin Galactic and Canopy.
