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Acreage Holdings: Analysts Weren’t Pleased after Disappointing Q1

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Investors and analysts weren’t pleased with Acreage Holdings’ (OTCMKTS:ACRGF) results for the first quarter of 2020. The company reported 65% revenue growth compared to the same quarter last year and 15% sequentially to $37.6 million. The revenue also beat analysts’ estimates of $34.9 million. However, Acreage Holdings had an EBITDA loss of $11.1 million. Canopy Growth (NYSE:CGC) amended its acquisition deal with Acreage Holdings due to growing market concerns. Acreage Holdings’ CEO also resigned. Overall, the markets didn’t take any of the news well.

Analysts cut Acreage Holdings’ target price

After the results, Eight Capital cut its target price for Acreage Holdings stock to $3 from $7. Cormark Securities also cut the target price to $3.5 from $7.25. Four analysts still cover Acreage Holdings stock after the earnings. The recommendations remained the same. Two analysts recommend a “strong-buy,” one recommends a “buy,” and one recommends a “sell.”

The average target price on the stock is $5.98, which shows an upside potential of 131% from the last closing price. Acreage Holdings closed 1.2% higher at $2.59 on Wednesday. Meanwhile, Canopy Growth has a majority “hold” rating with a consensus target price of $22.16. The target price represents an upside potential of 35% for Canopy Growth, according to its closing price yesterday. Canopy Growth closed 1.92% higher at $16.47 on Wednesday.

Analysts lowered the yearly estimates

For the second quarter, analysts expect Acreage Holdings to record revenue of $28.0 million—down from $37.6 million in the first quarter. The company’s management stated during the first-quarter earnings call that they expect the revenue to be flat in the second quarter compared to the first quarter. The revenue might be flat due to the divestiture of some unprofitable businesses.

The EBITDA losses could be around $7.3 million. Notably, the losses could eventually decrease but analysts don’t expect a profit before the first quarter of fiscal 2021.

Analysts also lowered the yearly estimates for the company by almost half after the results. Let’s take a look at the month-over-month revisions for Acreage Holdings. In July, the revenue estimate for fiscal 2020 is $139 million compared to $188 million in June. For fiscal 2021, the revenue estimate is $206 million compared to $489 million in June. However, the revenue estimate for fiscal 2022 remained the same at $240 million.

For fiscal 2020, analysts expect higher EBITDA losses. In June, the estimate was an EBITDA loss of $7 million. In July, analysts expect a loss of $30 million. For fiscal 2021, analysts expect a positive EBITDA. However, analysts lowered the estimate to $41 million from $105 million. The positive EBITDA estimate for fiscal 2022 remains the same at $61 million.

Canopy Growth amended the acquisition deal

Analysts might have lowered the estimates due to Canopy Growth amending the acquisition deal. The acquisition deal between Canopy Growth and Acreage Holdings has been big news. According to the original agreement made in 2019, Canopy Growth will acquire Acreage Holdings after the “triggering event” occurs. The “triggering event” signifies the US legalizing marijuana at the federal level. Recently, Canopy Growth amended the terms of the agreement. Canopy Growth also created new divisions in Acreage Holdings’ capital to provide more upside potential to shareholders. To learn more, read Canopy Growth Revised Its Agreement with Acreage Holdings.

The amended deal hinted at the struggles that the cannabis industry faced to receive financial aid, especially in the US. The COVID-19 pandemic increased cannabis sales. However, the companies that already faced a cash crunch continued to struggle. Marijuana isn’t legal at the federal level yet in the US. As a result, companies have a hard time getting financial help. The marijuana industry didn’t qualify for any emergency relief amid the pandemic like other small businesses in the US.

However, the deal is still on. If cannabis legalization happens sooner, the deal will likely be fruitful for both of the companies. Recently, Canopy Growth’s CEO said that he thinks marijuana legalization will happen by 2022. With support from Constellation Brands, Canopy Growth will be able to strengthen its footing in the US cannabis space and compete with Aurora Cannabis. Aurora Cannabis (NYSE:ACB) doesn’t have a strong deal yet with any other consumer giants.

In June, Canopy Growth, Aurora Cannabis, and Acreage Holdings fell 1.9%, 14.9%, and 17.7%, respectively. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) declined by 10.3% in June.

To learn more about the sector, read What to Expect from Marijuana Stocks in July.

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