Cannabis players are having a hard time this year. Many factors are at play. Regulatory concerns and weaker earnings due to the vaping-related crisis took a toll on the sector. Some of the companies even saw their stock fall more than 40% this year. Will the hard times end soon for the cannabis industry or is there more to it? Let’s take a look.
Cannabis producers’ sales estimates are “too aggressive”
Last week, BNN Bloomberg reported that CIBC analyst John Zamparo thinks that the revenue estimates for cannabis stocks are aggressive. The estimates could impact the stock prices going forward. The analyst thinks that the consensus revenue and adjusted earnings estimates are “unachievable.”
Zamparo expects cannabis sales to be around $2.2 billion in 2020 and $3.3 billion in 2021. He expects the EBITDA to be around $550 million for 2020 and $975 million for 2021.
Meanwhile, the consensus revenue estimates are $6.5 billion for 2020 and $7.5 billion for 2021. The consensus EBITDA estimate is $900 million for 2020 and $1.6 billion for 2021.
Also, Tilray CEO Brendan Kennedy thinks that cannabis suppliers lied about their funded capacity to attract higher valuations. Funded capacity is the amount of a company’s growing ability that doesn’t require an additional capital raise. Tilray suffered from lower sales in the first quarter. The company struggled to source enough high-quality marijuana.
According to a MarketWatch report, various sources in the cannabis industry revealed that Supreme Cannabis introduced funded capacity as a financial measure for cannabis companies. Supreme Cannabis thought that the metric was relevant for investors.
Cannabis companies with disappointing earnings this year
Canopy Growth (CGC) (WEED) missed the revenue estimate of 122 million Canadian dollars and reported net revenues of 90.5 million Canadian dollars in the first quarter of 2020. The company also missed the bottom-line estimates and reported extensive losses in the first quarter.
Aurora Cannabis (ACB) missed its revenue guidance in the fourth quarter and reported revenues of 98.9 million Canadian dollars. The company also missed analysts’ estimate of 108.2 million Canadian dollars. Aurora Cannabis even reported a negative EBITDA of 11.7 million Canadian dollars, which was lower than analysts’ estimate.
Both of these companies’ results took a toll on the entire sector, which proved that the expectations are too high from the cannabis industry. When companies don’t meet the expectations, it impacts the stock price.
Aurora Cannabis has fallen 12% YTD (year-to-date), while Canopy Growth has fallen 14.5%. Cronos Group has fallen 13%, while Aphria has fallen 9.6%. CannTrust (CTST) (TRST) has fallen 76%, while Tilray (TLR) has lost 65% YTD. Read Which Cannabis Stocks Have Lost More than 40% in 2019? to learn more.
What do other analysts expect from cannabis companies?
Analysts have high expectations for the top cannabis players in the next two years. Cannabis 2.0 will take place this month. The latest round of legalization focuses on edibles, vapes, and concentrates. Big companies are gearing up for expansion. They want to cash in on the Canadian market and US states where marijuana is legal.
Analysts expect Aurora Cannabis’s revenues to be around 594.5 million Canadian dollars for fiscal 2020, which is an increase of 139% YoY (year-over-year). For fiscal 2021, the estimate is approximately 959.8 million Canadian dollars.
Analysts expect Canopy Growth’s revenues to be around 584 million Canadian dollars for fiscal 2020, which is an increase of 139% YoY. For fiscal 2021, the estimate is around 1019 million Canadian dollars.
Cronos Group (CRON) will likely report a revenue increase of 253% to 55.5 million Canadian dollars for fiscal 2020. The estimate is around 198.9 million Canadian dollars for fiscal 2021.
Are the estimates for marijuana players aggressive?
The revenue estimates look aggressive considering that the industry faces a lot of headwinds. Cannabis stocks might be on a rollercoaster ride if they don’t deliver these revenue estimates. Also, smaller companies’ lower revenues impact larger cannabis companies. As a result, small businesses might shutdown. Small cannabis businesses are already pressured due to the low financing needed for expansion. Banks hesitate to help since marijuana still isn’t legal at the federal level. However, the problem might have been resolved. The SAFE Banking Act passed last week. Banks and financial institutions will be able to provide loans to cannabis players.
Will tough times continue for the marijuana sector?
Black market sales are another concern. Since marijuana isn’t legal at the federal level, it encourages illicit activities and boosts illegal cannabis sales. While investors expect the cannabis industry to expand after the US legalizes marijuana, missing revenue estimates could be disappointing. Investors might lose confidence in the sector.
Many states including Wisconsin, Pennsylvania, and South Dakota are stepping up to legalize cannabis. More countries legalizing marijuana puts pressure on the US. However, we don’t expect legalization to happen soon.
We can expect to see more regulatory concerns, supply issues, and illicit activities, which could impact cannabis companies’ performance. Investors need to be cautious before making any investment decisions. The stock market and risk are related. The cannabis industry is an evolving industry that still carries a lot of uncertainty.
The Horizons Marijuana Life Sciences ETF (HMMJ) tracks the North American cannabis industry. HMMJ has lost 17% YTD.
Should investors take a chance or wait for the situation to improve? We’ll have to see how things unfold. Meanwhile, stay with us for the latest updates on the cannabis sector.