This year has been one of the cannabis industry’s worst. Canadian cannabis stocks Canopy Growth (CGC), Aurora Cannabis (ACB), and Cronos Group (CRON) closed at year-to-date discounts of 33.43%, 32.97%, and 30%, respectively, yesterday. They closed at premiums of only 3.48%, 4.53%, and 14.07% to their respective 52-week lows on the Toronto Stock Exchange. What’s behind their decline?
CGC, ACB, and CRON affected by global market uncertainty
Global uncertainty has impacted investor sentiment for cannabis stocks as well as the overall market. Trade tensions have wreaked havoc on the global economy. On October 1, CNBC reported the World Trade Organisation had lowered its world trade growth estimate from 2.6% to 1.2% for 2019, and from 3.0% to 2.7% for 2020.
On October 15, the International Monetary Fund reduced its global GDP growth forecast for 2019 from 3.2% to 3.0%, suggesting trade tensions could slow global growth to its lowest level since the financial crisis. And on March 22, the US yield curve inverted. Although the yield curve reverted on October 11, worries about an impending slowdown persist.
There’s also the possibility of Britain exiting the EU without a deal, which could have a far-reaching impact on the global economy. Bloomberg reports New York University professor Nouriel Roubini thinks the event could trigger a recession in Europe.
And on October 30, the Bank of Canada suggested the Canadian economy could shrink by 4.5% by 2021 if global uncertainty increases. This decline would be especially concerning for the cannabis industry, as most major players are incorporated in Canada.
In such difficult times, investors prefer to shift their funds to safe havens. Their lack of confidence seems to be affecting the still-nascent cannabis industry, which has no history of facing downturns.
Industry-specific problems abound in the cannabis sector
Cannabis companies are also facing multiple industry-specific risks. The vaping crisis shows no signs of abating. On October 31, the CDC (Centers for Disease Control and Prevention) reported 37 deaths and 1,888 lung injuries associated with vaping as of October 29. This report marked a significant jump from the CDC’s previous estimate of 33 deaths and 1,479 injuries associated with vaping as of October 15.
Black market sales continue to eat into the regulated sector’s sales, and may irreparably damage the cannabis industry’s credibility. Many health officials are voicing the possibility of link between vaping-related disease and illicit cannabis products.
The cannabis industry is also receiving a lot of flak from environmentalists. Cannabis is an energy-intensive industry. And according to JSTOR Daily, black-market growers trespass on and damage wildlife habitats. Cannabis cultivation facilities are also linked to air pollution, reports JSTOR Daily.
On October 10, HEXO (HEXO) gave a disappointing pre-earnings release announcement, reducing its preliminary fourth-quarter revenue and withdrawing its fiscal 2020 outlook. The company attributed the reduction and withdrawal to industry-wide problems such as slower-than-expected retail store openings in Canada and delayed government approvals for cannabis-derived products. The company also highlighted early signs of pricing pressure in the industry. Access to capital is another major constraint for the cannabis market. After the press release, HEXO and many other cannabis stocks tumbled.
CGC and ACB face company-specific concerns
On October 14, MKM Partners analyst Bill Kirk discussed softer “absolute industry pricing” in the cannabis space. And on October 14, Seaport Global analyst Brett Hundley highlighted the link between Canada’s slower-than-anticipated retail rollout and industry-wide pricing pressures. According to Hundley, prominent cannabis players CGC, ACB, and CRON have continued to expand their cultivation capabilities. However, Canada’s distribution and sales network hasn’t kept up, exacerbating industry pricing pressures.
In the fourth quarter, Aurora’s revenue of 99 million Canadian dollars missed analysts’ average estimate by 4.6 million Canadian dollars. The company’s high debt and spending are also causing concern among analysts and investors. To learn more about Canopy Growth’s company-specific issues, read Why Canopy Growth Stock Has Been a Disappointment.
Is there an upside?
Although the cannabis industry’s scenario looks far from rosy, there are a few upsides. Marijuana legalization is catching on across multiple US states, and presidential candidate Bernie Sanders has even proposed legalizing marijuana federally. There are also steps being taken to legalize marijuana in Mexico and Germany.
A larger addressable market could relieve some of the cannabis industry’s pricing pressure. Canadian cannabis companies with surplus production stand to benefit the most from these ongoing marijuana legalization initiatives. Cannabis 2.0 legalization could also boost demand for cannabis-infused edibles, beverages, and vapes in Canada, bolstering cannabis companies’ revenue growth and profitability. For more cannabis news, visit 420 Investor Daily.