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Are Marijuana Companies Bad at Forecasting?

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Marijuana companies’ earnings and stock performance were highlights in 2019. There was hope that 2019 would be a good year for the sector. Canada legalized recreational marijuana in 2018. However, the industry missed the expectations, which concerned investors. Most of the big cannabis players continued to report dismal performances in 2019. Analysts tried to understand the disappointing performances. Overall, many analysts think that marijuana companies are bad at forecasting.

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Are marijuana companies bad at forecasting?

A Market Watch report discussed MKM Partners analyst Bill Kirk and his team’s analysis of how good marijuana companies are at forecasting. Marijuana companies’ executives forecasted the negatives correctly. However, when it comes to making promises and fulfilling them, most of the companies’ management teams failed. MKM Partners’ team scrutinized the six top Canadian cannabis companies’ earnings transcripts. The result showed that management made 947 promises, predictions, or forecasts for the future.

Among the companies, only 48% of their promises lived up to the mark. Kirk said, “Weed executives were right 51% of the time for predictions they made where the outcome is clear. The group’s predictions were no better than a coin flip.”

What forecasts did cannabis companies make?

Canopy Growth (NYSE:CGC)(TSE:WEED) promised to hit revenue of 1 billion Canadian dollars in fiscal 2020. The company reported a disastrous performance in the first two quarters of 2020. The cannabis sector struggled with a demand-supply imbalance. A lack of legal stores in Canada and more black market marijuana sales impacted Canopy Growth and other cannabis companies’ revenue.

However, Canopy Growth still promised to hit the target despite the headwinds. The company even discussed the headwinds in its second-quarter press release.

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The company’s second-quarter results struggled due to fewer retail stores and provinces and fewer purchases to handle the demand-supply situation. Although Canada set regulations to allow more stores, it could take a while. Analysts took note of this and reduced their predictions for revenue for fiscal 2020 in December.

Forecasts for fiscal 2020

In January, analysts reduced the revenue estimates from 417 million Canadian dollars to 408 million Canadian dollars. Analysts expect Canopy Growth to hit revenue of 1 billion Canadian dollars but not before fiscal 2022. In January, analysts reduced the revenue estimates for Aurora Cannabis (NYSE:ACB) from 383 million Canadian dollars to 381 million Canadian dollars for fiscal 2020. For Aphria, the revenue estimate for fiscal 2020 could be around 540 million Canadian dollars. For HEXO, analysts reduced the revenue estimate from 80 million Canadian dollars to 81 million Canadian dollars.

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I think that analysts are predicting a delay in store openings in 2020. There’s hope that Cannabis 2.0 products could generate higher revenues. However, a lower store rollout could cause delays. Recently, a Raymond James analyst said that cannabis companies won’t rebound until the last quarter of 2020.

An MKM analyst also discussed the promises that Aurora Cannabis had made to continue the partnership with Green Organic Dutchman. Notably, the partnership ended in 2019. Cronos Group (NASDAQ:CRON) and Tilray also made some predictions that didn’t happen. HEXO continued to miss its forecasts. The company withdrew its fiscal 2020 outlook last year. Also, the stock took a significant hit after CFO Michael Monahan resigned.

Marijuana companies stock performance

Recently, Aphria (NYSE:APHA) decided to be practical about the current situation. The company lowered its fiscal 2020 outlook. Despite reporting excellent results, the company analyzed what’s impacting the industry right now. Illicit cannabis sales continue to haunt the sector. Aphria thinks that a slower store-roll out in Canada, the temporary ban on vape products in Alberta, and many other factors could still impact its revenues. Now, the company’s management expects its revenue to be around 575 million–625 million Canadian dollars. The EBITDA will likely be around 35 million–42 million Canadian dollars.

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As a result, Aphria stock took a hit. Currently, Aphria and OrganiGram are in a good position among cannabis companies. OrganiGram also reported strong first-quarter results. Recently, BMO went bullish on Canopy Growth, while Cowen went bullish on Aurora Cannabis. Until now, 2020 has been a good year. However, most of the cannabis stocks are trading in the red today. At 10:32 AM ET, Aurora Cannabis stock has risen 0.73%, while Canopy Growth has risen 0.72%. Aphria stock has fallen 1.5%, OrganiGram has fallen 3.1%, Cronos Group has fallen 1.5%, and HEXO has fallen 1.1%.

An MKM analyst said,” This analysis can help determine management reliability, which is important as many have imminent fundraising needs. Bill also feels that investors should carefully note down the negative comments the management makes during earnings discussions and not to rely much on the positive expectations.”

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