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Top 5 Reasons Why Cannabis Earnings Disappointed


Nov. 15 2019, Updated 2:28 p.m. ET

There seems to be no end to the cannabis sector’s woes. Prominent cannabis players Aurora Cannabis (ACB), Canopy Growth (CGC), Hexo (HEXO), Cronos Group (CRON), and Charlotte’s Web Holdings (CWEB) (CWBHF) have reported disappointing results in the latest earnings season.

Plus, the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the ETFMG Alternative Harvest ETF (MJ) are down by 40.33% and 31.07%, respectively, year-to-date. Let’s analyze the five key factors that have pulled down investor sentiment for the cannabis sector.

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Majority of cannabis companies missed consensus revenue estimates

In the first quarter, Aurora Cannabis’s net revenues of 75.24 million Canadian dollars fell short of the consensus of 94.24 million Canadian dollars. Canopy Growth’s (CGC) second-quarter revenues of 76.61 million Canadian dollars missed the consensus of 108.48 million Canadian dollars.

Cronos Group’s third-quarter revenues of 12.7 million Canadian dollars fell shy of the consensus of 14.62 million Canadian dollars. Hexo’s fourth-quarter revenues of 15.42 million Canadian dollars were lower than the consensus of 16.04 million Canadian dollars.

Charlotte’s Web Holdings’ third-quarter revenues of $25.05 million missed the consensus of $32.5 million. Aphria’s (APHA) first-quarter revenues of 126.1 million Canadian dollars also fell short of the consensus of 132.2 million Canadian dollars.

Most cannabis companies aren’t yet EBITDA-positive

The majority of the prominent cannabis companies have yet to record positive EBITDA metrics. In the first quarter, ACB’s reported an adjusted EBITDA of -39.67 million Canadian dollars, missing the consensus of -19.53 million Canadian dollars. MKM Partners analyst Bill Kirk also doesn’t concur with the consensus expectation of ACB becoming EBITDA-positive by June 2020.

CGC’s second-quarter adjusted EBITDA of -155.7 million Canadian dollars was lower than the consensus of -92.9 million Canadian dollars. Cronos’ third-quarter EBITDA of -23.93 million Canadian dollars fell short of the consensus of -19.8 million Canadian dollars.

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Aphria has been one of the few companies to report positive first-quarter EBITDA of 1.0 million Canadian dollars, higher than the consensus of -2.2 million Canadian dollars. However, the positive EBITDA was due less to operational performance and mostly attributable to fair value adjustment for biological assets.

Companies face pricing pressures

The cannabis sector is facing significant pricing pressures due to the current oversupply and a relatively slower rollout of retail outlets in Canada. The limited retail infrastructure in Canada led to excess inventory at the provincial distributor level. This has significantly affected the shipments and revenues of a majority of cannabis companies.

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Cannabis 2.0 products not on the market yet

Although Cannabis 2.0 was legalized in Canada on October 17, these products have yet to commercially enter the market. The resulting pre-revenue investments are reflecting poorly on the margins of most of the cannabis companies.

The ongoing vaping crisis also added to the uncertainty for the success of Cannabis 2.0 products. The CDC’s recent announcement about the possible role of Vitamin E acetate in vaping-related lung injuries may provide some respite to the regulated cannabis sector.

Companies are downsizing capital investments

In its first-quarter earnings press release, Aurora Cannabis highlighted its plans to reduce capital investments over the next few quarters by more than 190 million Canadian dollars. This could help prevent the supply-demand mismatch in the near future.

In its operational update, Zenabis also highlighted its plans to reduce cash outflows for capital expenditures. A reduction in capex spending indicates a prolonged slowdown in the industry.


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