The cannabis industry is likely to be a major moneymaker in the years to come. A new report from Arcview Market Research and BDS Analytics estimates that worldwide licensed-store sales — which excludes cannabinoid-based pharmaceutical sales and cannabinoid sales in general retail stores, such as supermarkets — could hit more than $40 billion by 2024, up from less than $11 billion in 2018.
Although estimates on what peak yearly sales might look like by 2024, 2030, or whatever year analysts choose as their end mark vary wildly, one thing is for certain: Investors expect marijuana’s “Big Four” pot stocks to thrive. That’s why…
Canopy Growth (NYSE:CGC), Aurora Cannabis(NYSE:ACB), Cronos Group (NASDAQ:CRON), and Tilray(NASDAQ:TLRY) have been able to support hefty valuations for so long. Despite all four still ramping up their production and processing operations, they respectively carry market valuations of $13.8 billion, $7.7 billion, $5.1 billion, and $4.6 billion.
But the reality of investing in the cannabis space is that, while sales are expected to soar, there will be bumps in the road. These four pot stocks may have the full and undivided attention of Wall Street and investors, but forecasts of rapid sales growth still may not be enough to save them from another year of losses in fiscal 2020. (I say “fiscal 2020,” because some of these marijuana stocks — Canopy and Aurora — run on different 12-month cycles than a calendar year.)
Here’s a brief synopsis why each of the Big Four pot stocks will likely lose money in 2020.
Even though Canopy Growth has a number of factors working in its favors, including having roughly 70,000 kilos’ worth of supply agreements (in aggregate) with all 10 Canadian provinces, and netting cultivation licenses on more than 4.8 million square feet of its 5.6 million square feet set aside for growing, it’s arguably the likeliest to lose money in fiscal 2020.
Canopy Growth has mostly thrown caution to the wind with its aggressive international expansion plans. For instance, pushing into the U.S. hemp market via a processing license in New York state and the acquisition of intellectual property company ebbu in November will likely pay long-term benefits for Canopy by allowing it to establish important processing infrastructure in the United States. If the U.S. federal government ever legalizes marijuana, it’ll have a leg up on its competition. But these moves on the proverbial chessboard may not play out for many years to come, which is saddling Canopy Growth with large operating expenses and big losses in the interim.
The other factor to consider here is that, as Canopy Growth’s operations have expanded into more than a dozen markets, its share-based compensation for its growing number of employees has increased substantially, too. With little near-term payoff on this expansion, this expensing and ultimate share-based dilution will hurt its operating results.
Also, having recently shown the face of its company the door, Canopy’s board is now searching for a permanent CEO option. No matter who the new CEO is, cost-cutting will likely be priority No. 1 for fiscal 2020.
Aurora Cannabis slots in as the largest projected grower in Canada, with at least 625,000 kilos of annual run rate output forecast by the end of fiscal 2020 (June 30, 2020). Unfortunately, producing more marijuana than every other grower doesn’t necessarily mean the company will be profitable next year.
There are two factors working against Aurora Cannabis’ push to profitability (and no, dilution isn’t one them, even though it’s a topic I like to harp on).
First, there’s the ongoing supply side issues in Canada. Health Canada was contending with a backlog of over 800 license applications, mostly for cultivation, in January, yet has approved fewer than 190 licenses for cultivation, processing, and sale since 2013. Growers looking for the OK to grow, process, or sell marijuana have had to wait months, if not more than a year, for the green light. Even though Health Canada has a fix for this backlog mess, Aurora is still awaiting licensing on three of its largest facilities, and it’s clearly been affected by early-stage supply issues. Health Canada is working toward a resolution, but it’s not going to happen overnight.
The second issue here is that Aurora has set itself up to dominate the global medical cannabis scene with a presence in 24 countries (including Canada). However, this geographic diversity only comes into play when domestic demand has been satiated. It’s highly unlikely that recreational weed supply in Canada meets demand in 2020, pushing out Aurora’s chance to shine until 2021, at the earliest…
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