During the First quarter, and in each of the previous years, marijuana stocks were the hottest thing since sliced bread. The expectation had been that global cannabis sales would grow many times over in the years to come, potentially hitting as much as $200billion annually by 2030, according to investment bank Steifel.
But things have changed in a big way since the end of march. Marijuana stocks have been in a precipitous downtrend for more than seven months, with pretty much every cannabis investor looking at double digit percentage declines across the board.
If you own pot stocks, you’ve seen a lot of money disappear lately
Cannabis stock weakness become even more telling when the percentages and putting this downtrend into easier-to-understand terms, such as dollars lost. Since April 25, 2019, about $35billion in value has been wiped away. Here’s a summary in defending orde, of some of the largest declines in market value in the last 6.5 months:
– Canopy Growth (NYSE-CGC): $10.0billion in market cap lost.
– Aurora Cannabis: $5.6billion
– Cronos Group: $2.79billion
– Tilray: $2.79billion
-Curaleaf Holdings: $2.67billion
– Acreage Holdings: $2.11billion
– Harvest Health & Recreation: $2billion
– GW Pharmaceuticals: $1.72billion
– Medmen Enterprises (OTC-MMNFF): $1.+5 billion
– Cresco Labs: $1.03billion
– HEXO (NYSE-HEXO): $0.95billion
– Charlotte’s Web:$0.73billion
– Aphria (NYSE-APHA): $0.72billion
– OrganiGram Holdings: $0.44billion
– Trulieve Cannabis: $0.23billion
Add this up, and it’s just shy of $35billion market cap thats gone up in smoke since late April.
Canadian supply issues aren’t easily resolvable. Regulatory agency Health Canada has been tasked with reviewing and approving cultivation and sales licences of more than 800 applications to review. Even with changes to its cultivation licensing application process, all growers must now have completed their cultivation facilities before submitting their cultivation application. The agency will need numerous quarters to work through its backing. This means lengthy delays in bringing product to market.
Aphria, for instance, waited between 18 and 21 months for licensing approval of its joint venture Aphria diamond facility. This grow site will ne responsible for 140,000 kilos of Aphria’s 255,000 kilos of peak annual output.
Quebec based grower HEXO cited this delayed launch od derivatives as one if the primary reasons its sales fell well short of prior forecasts in the fiscal fourth quarter. Derivatives are a much higher margin product than dried cannabis flower, so their slow-stepped emergence means pushing any chance of profitability foe companies like HEXO out even further.
High tax rates as states are driving consumers to the black market
Within the united states, high tax rates have been responsible for weakness in the cannavia industry, although the impact of taxation varies from state to state.
California, which projects as the largest marijuana market in the world by annual sales, has made it virtually impossible for its legal pot companies to compete against the black market. Consumers are absorbing high state and local tax rates, a 15% excise tax, and a wholesale tax on either dried cannabis flower or cannabis leaves. This works out to an aggregate tax of as much as 45%, and still doesn’t include added expanses, such as laboratory testing for quality that are being factored into legal-channel pricing.
Operating have been abysmal
Canopy Growth has been an absolute mess come earnings time. When the company reported its fiscal first quarter operating results in August, it delivered the lowest margin do its peers, as well as a loss that surpassed $1.28billion Canadian. Even removing the establishment of warrants, Canopy Growth lost about CA$216million on an operating vasia in Q1 2020.
Whats perhaps most notable about this loss is that CA$77.1million in expanses came from share-based compensation. Former co-CEO Bruce Linton felt that the best way to create loyalty among employees was to grant them long-term-vesting stock. This also means driving up costs on the company’s income statement. Because of Linton’s aggressive expansion tactics, this share-based compensation, Canopy looks to be at least two years away from any shot at recurring profits.