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The strong rally that has propelled cannabis stocks higher since Democrat Joe Biden won the 2020 presidential election took a pause on Tuesday, as analysts weighed in on earnings from three industry heavyweights and found little to justify some of the explosive gains.
The Cannabis ETF THCX, -5.79% has rallied 25% in the month to date, as Biden’s election sparked hopes he would advance a more pro-reform agenda than incumbent President Donald Trump. The sector has struggled during Trump’s administration as the Senate has blocked efforts to help companies in states that have legalized to access the federally-insured banking system.
Legalization hopes were also fueled after four states — New Jersey, Arizona, Montana and South Dakota — voted in favor of adult-use, boosting the U.S. recreational market to 15 states with more than 110 million residents.
Individual stocks have been on a tear, led by Aurora Cannabis Inc. ACB, -25.01% , ACB, -25.80% the most widely held stock on the Robinhood trading app.
Aurora reported earnings on Monday that Jefferies analyst Owen Bennett said don’t justify the massive run-up in its shares.
“Aurora’s share price as of the time of writing is running up 135% since end of day on Wednesday,” said Bennett. “Some may look at this performance, which also included gains of over 20% at one point intraday today, and assume a much improved fundamental outlook and strong quarterly numbers. This is not the case, with Q1, for us, not really standing out as anything special or overly encouraging.”
Aurora’s revenue was ahead of expectations, but “we would argue in the details there remains reason for caution,” said the analyst.
Aurora’s Daily Special discount brand has been a big part of its sales, but the company is now aiming to pivot more to premium flower brands in a reset of its top line.
“For this reset to be deemed a success we would need to see any lost sales from Daily Special being more than offset (in a growing market) by sales elsewhere. This is not the case,” said Bennett.
In flower, Daily Special sales declined by C$5mn ($3.9 million) while the rest of its flower business was roughly flat, while in extracts, ex CBD in the US, it only added sales of $2.2 million, “not overly impressive given the extent of Aurora’s 2.0 portfolio,” he said. Jefferies rates Aurora as hold with a C$6.90 price target. The stock was down 24% Tuesday.
Canopy Growth Corp. shares CGC, -3.17% WEED, -3.91% slid 3.4%, after MKM Partners’ Bill Kirk said its profit did not match revenue growth, suggesting “the incremental ROIC (return on invested capital) wasn’t particularly strong perhaps led by limited margin economy priced product.”
See: As pot stocks boom on hopes for U.S. legalization, Canadian cannabis companies struggle for growth
Kirk raised his earnings estimates, but said he sees no upside in his discounted cash flow model.
“We are modeling Canopy becoming a multibillion revenue generating company with 30% EBITDA margins. This outlook would definitely be considered a ‘success,’ but only generates $28/share of value on the existing outstanding shares. Reiterate Neutral,” he wrote.
Tilray Inc. TLRY, -16.73%, which also reported late Monday, came closest of the three to a profit, with losses of just 2 cents a share and promises of adjusted profitability in the fourth quarter. Sales barely budged from last year, but executives blamed that on bulk sales last year that the company halted to focus on core businesses.
“Though we have a high degree of confidence that [Tilray] will emerge a strong player long-term in the global cannabis market, the valuation near the high end of the Canadian LP average keeps us at Neutral for the time being,” said Ladenburg Thalman analyst Glenn Matson. “We would look to grow more constructive on the name once clarity emerges on a broader U.S. growth strategy or the European market sees an inflection point.”
Elsewhere in the sector Organigram Holdings Inc. shares OGI, -22.18% fell 22%after the company said it is offering C$60 million of units in a syndicated deal led by Canaccord. Each unit will be priced at C$1.85 and will be comprised of one share plus one half of one common share purchase warrant. Warrants will be exercisable to acquire one common shares for up to three years following the closing date at an exercise price of C$2.50 per warrant share.
Proceeds of the deal will be used to repay debt and for working capital and general corporate purposes.
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Among few gainers, vape and accessories maker Greenlane Holdings Inc. GNLN, +9.43% was up 8%, Cresco Labs CL, +0.81% was up 1.2% and Aleafia Health Inc. ALEAF, +1.22% was up 1.2%.
Cronos Group Inc. CRON, -2.00% CRON, -2.54% was down 2.4%, and Aphria Inc. APHA, -2.16% APHA, -2.91% was down 2.8%.
The Cannabis ETF has fallen 14% in the year to date, while the S&P 500 SPX, -0.02% has gained 10%.
