These are rough times for cannabis stocks. Major cannabis stocks like Aurora, Canopy and GW Pharmaceuticals are trading in the red after reporting weak quarterly reports that show lackluster growth. Cannabis ETFs are also in the red as the broader industry is posting losses.
Aurora Cannabis Inc (NYSE: ACB) is in the news after the company posted its fiscal first-quarter results, reporting a 24% sequential decline in revenue. The biggest red flag for investors was signs of slowing expansion of Aurora in Canada and beyond. In the quarter, Aurora sold just 12.5 tons of cannabis and produced 41.4 tons. The company’s cash cost per gram dipped to C$0.85 from C$1.14 in the prior quarter. The company also announced that it would halt the construction of a new facility in Denmark, as it monitors the demand in Canada.
MKM Partners analyst Bill Kirk recently said in a report that pot investors should brace for more bad news as he expects major cannabis companies to suffer until at least 2021.
Kirk expects Aurora Cannabis to report positive EBITDA by the first quarter of 2021, compared with the current consensus of the third quarter of 2020.
Aurora’s results are a reflection of deeper and broader problems in the cannabis industry.
Earlier this year, while cutting estimates for Canopy, Scotiabank’s Oliver Rowe and Ben Isaacson said that for the broader cannabis industry, retail cannabis store openings are expected to remain lower than expected, while the availability of adult-use recreational cannabis products remains limited. The analysts also believe that returns from the medical cannabis industry are flat.
We believe that you should proceed with caution when it comes to cannabis stocks. The cannabis industry is bound to face legal challenges in the future. According to CIBC analyst John Zamparo the current estimates for the cannabis industry are aggressive. For example, Zamparo predicts that cannabis producer sales will grow to $2.2 billion in 2020 and $3.3 billion in 2021, compared to the current estimates of $6.5 billion and $7.5 billion, respectively, according to BNN Bloomberg.
If you choose to invest in cannabis stocks, be ready to wait for a long time to bear fruits. After all, legal weed sales around the world are expected to cross the $40 billion mark by 2024. For investors looking for short-term gains, it’s better to stay away.