Aurora Cannabis (ACB)(ACB.TO) plans to announce its earnings after the market closes. However, its stock is already trading on a weak note. A large part of this dim view seems to be steered by Canopy Growth (CGC)(WEED).
Aurora Cannabis’s weakness
Canopy Growth released a displeasing report this morning, as its revenue growth slipped about 6% from the previous quarter. Moreover, its revenue of 76.6 million Canadian dollars missed the analysts’ projection by a huge margin. As if this wasn’t enough, the company posted deeper-than-expected losses. Consequently, investors saw the value of their assets sink by 17% in the early morning hours.
Charlotte’s Web Holdings (CWEB.TO) also posted its earnings earlier this week. Like Canopy Growth, this company also missed estimates. Since then, the company has lost about 21% of its value.
Setting the stage
Canopy Growth’s earnings weren’t the only driver, as the overall cannabis market seems to be muted. Companies are having a hard time growing sales, and it seems as if the demand isn’t there. To understand this issue, let’s look at its business activities in recent years.
Cannabis companies incurred heavy capital costs to grow their businesses. However, without much growth, the future looks challenging. With these upfront costs, companies reported losses. However, future sales were intended to offset these expenses. Eventually, investors would see the profits increase and stocks rise.
Aurora Cannabis’s earnings
Aurora Cannabis was trading about 11% lower early this morning. Analysts estimate revenue of 94.9 million Canadian dollars. Unlike Canopy’s revenue, which grew 6% from the previous quarter, Aurora’s revenue is estimated to decline by 4.8%. Looking beyond the current quarter, analysts have also lowered their estimates for 2020. This shows that the company isn’t expected to deliver a stellar performance.
Note that we are comparing its performance to the previous quarter for consistent comparability. Cannabis companies just began selling adult-use cannabis in October 2018. Assuming there is no seasonal impact, comparing performance with the previous quarter provides a clearer picture than a year-over-year comparison.
What should you do?
I believe this market weakness could continue. If you bought the stock at a high price, there isn’t much you can do. If you sell now, you’d be booking your paper losses.
In my opinion, cannabis companies could see a reversal if the US market develops. As of now, that isn’t in sight either. If I held these cannabis stocks, I’d stay put until the market sentiment erodes.