The cannabis industry is one of the market’s most dynamic. It’s seen massive growth in the last few years due to continued legalization by countries and US states. Recently, though, marijuana stocks are making the news for all the wrong reasons. Most high-profile cannabis companies reported disappointing earnings results this month.
Marijuana stocks have now been plummeting for the last two quarters. Are these indications of a dying industry?
Earnings of leading cannabis companies
Canopy Growth (CGC) (WEED) recently reported terrible results, which caused a 15% decline in its stock the next day. The company missed revenue estimates by almost 40% and net profit estimates by almost 140%. It reported net revenue of 77 million Canadian dollars, implying a 15% decrease in its revenue from the previous quarter. The company’s net loss also widened by 13% from last year’s second quarter.
Aurora Cannabis (ACB) (ACB.TO) also reported disappointing results for the first quarter of fiscal 2020. The company reported revenue of 75.3 million Canadian dollars in its first quarter, implying a decline of 24% from 98.9 million Canadian dollars in the fourth quarter of fiscal 2019. Revenue in its Consumer Cannabis segment also fell 33% sequentially. Further, the company reported 39.7 million Canadian dollars’ worth of EBITDA losses.
Tilray’s (TLRY) third-quarter revenue was better than analysts’ estimates, but it slipped in terms of its EBITDA and net losses in the period. The company reported $55.1 million in revenue, 10% higher than analysts’ estimates. Its revenue also increased 408.6% from the previous year’s third quarter. Further, the company reported -$23.5 million in adjusted EBITDA, 20.7% lower than estimates. It further reported -$35.7 million in net losses, almost 25% worse than analysts’ estimate.
Even though reports such as the one by Grand View Research suggest that the industry is growing, the stocks and legal earnings in the market tell a different story. As per Grand View Research, the cannabis market is expected to grow at a compound annual growth rate of 23.9% globally. The research further estimates that the industry’s value will be $66.3 million by 2025. But experts believe industry growth is overhyped and the cannabis bubble has burst.
Brian Madden, portfolio manager at Goodreid Investment Counsel, recently expressed his detachment from the cannabis industry. He believes the industry has too many uncertainties due to legalization and fluctuating market share. Further, he claims that the stocks of cannabis companies are overvalued. He advises investors to steer clear.
Cowen CEO Jeff Solomon recently said that potential investors are avoiding the cannabis industry due to their distrust of the industry and not due to the price of cannabis stocks. Mark Noble of Horizons ETFs said that the cannabis sector’s future is uncertain, as no one can predict the effects of governance practices on the industry.