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Cannabis Shares Tumble on Weak Earnings

Cannabis stocks have been hammered recently as it appears that most are reporting that weaker than expected demand has eroded revenue and earnings.  By mid-November, the Alternative Harvest ETF (NYSE:MJ) was down by 11.3% for the month, as traders continue the process of readjusting the stock prices of many of the Canadian public cannabis companies.

Demand Has Yet to Immerge

Demand has yet to immerge in Canada in the wake of legalization of recreational marijuana nationally in 2018. Ahead of this event, suppliers boosted production and now oversupply is weighing on prices. This has forced write-downs of inventories, as stockpiles grow to untenable levels. It will take a while for growers to pair back their production, due to lack of demand, but until this occurs, a shake out will continue to occur in the cannabis space.

Earnings Disappoints

All eyes were focus on Canopy Growth’s financial results to see how one of the larger players performed during the latest quarter. Canopy reported a loss of C$374.6 million, which is equivalent to $282.4 million or C$1.08 a share, in the quarter, which was a great than the C$330.6 million loss, or C$1.52 a share, posted in the year-earlier period. Sales rose to C$76.6 million from C$23.3 million. Expectations were for the company to lose 41 cents a share and revenue of C$100 million.Canopy’s revenue of C$76.6 million was lower than the C$90.5 million generated in the first quarter.

Cronos Also Misses

The loss experienced at Canopy was the straw that broke the camel’s back. The decline the entire sector, could continue to perpetuate until the market feels that prices reflect future demand for recreational marijuana. Other company mimic the poor performance from Canopy.

Cronos Group reported a quarterly loss of $0.02 per share versus expectations of $0.03. This compares to loss of $0.03 per share a year ago. Cronos shares have lost about 22.2% since the beginning of the year. Cronos group posted sales of $10.10 million for the quarter, missing expectations by 3.5%. This compares to year-ago revenues of $2.88 million.

Aurora Cannabis also missed on the bottom line. The company reported a loss of C$39.7 million, wider than the C$20.8 million expected. Sales came in at C$75.2 million, which was also a miss coming in below forecast of C$90.6 million. Sales into the Canadian recreational market dropped 33% to C$30 million. Aurora plans to cut capital cost by immediately suspending the building of a new facility. New retail facilities will also be reduced.

The overall outlook for the sector is weak, as supply dwarfs demand. Full legalization in the United States, could help reduce the supply glut. This is likely a long way off which puts the Canadian cannabis industry in a period where there will likely be consolidation. Companies that do not have scale and are unable to reduce costs while continuing to produce revenues will be gobbled up by larger players.

 

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