uploads/2019/06/marijuana-2690984_1280.jpg

Cannabis Stocks Valuation Continue to Drift Sideways

By

Updated

Valuation moves sideways

Cannabis sector stocks haven’t risen in the past three months due to disappointing earnings, which largely missed the expectations. Investors hoped that the companies would post huge sales figures in anticipation of recreational cannabis growth.

Article continues below advertisement

Forward EV-to-sales multiple

The EV-to-sales multiple is one of the first valuation multiples that’s suitable to evaluate cannabis companies. Most of the cannabis companies have negative earnings. For the cannabis sector, the forward EV-to-sales multiple was trading at a median of 5.8x. The overall peer median in the cannabis sector consists of 12 players including Tilray (TLRY), Canopy Growth (WEED), Aphria (APHA) and others. Tilray and Canopy Growth were trading at a premium to the median, while Aphria was trading at a discount. While the median is slightly lower than the levels observed last month, the multiples have more or less remained rangebound around this level.

Compared to January 2017, the current valuation multiples appear to be at the lowest level. The market might be in the oversold territory or this is the new normal for cannabis sector stocks. For several of the peers discussed above, the recent earnings report fueled some weakness in the cannabis sector’s future outlook. As a result, justifying previous valuation highs is challenging.

Advertisement

More From Market Realist