If you were among those who invested in cannabis stocks, you may now be worried about another dot-com bubble. Major pot stocks have seen share prices drop in the past several months, contrary to expectations.
You may have expected exponential growth following the legalization of recreational marijuana in Canada, so this may make you worried about the entire industry.
The good news is that this is still no reason to panic and shun pot stocks altogether. First off, growth estimates for legal marijuana are still on track. There is an excellent explanation for this inexplicable trend, but you need to look at some specific companies to see it.
Two great examples to illustrate the state of the cannabis industry are Aphria Inc. (TSX:APHA) (NYSE:APHA) and Cronos Group (TSX:CRON)(NASDAQ:CRON).
Why are pot stocks on the decline?
On April 15, 2019, Aphria announced earnings for the third quarter of fiscal 2019 ended February 28, 2019. In the earnings report, APHA had recorded a net income loss of $108.2 million or $0.43 per share.
The damage was contrary to market expectations of $0.03 gains per share, sending stocks 15% lower from the previous trading day’s closing price of about $13.50 on the TSX.
Positive results then followed these depressing results in the fourth quarter of fiscal 2019 ended May 31, 2019. In this quarter, profit was $15.76 million following a 74% growth in revenue from the third quarter. Although stocks grew significantly by 40% after the news, share prices would still not break above $10.
The story is not much different from that of Cronos, which has experienced a decrease of over 50% in stock price since the beginning of the year. However, unlike Aphria, which enjoyed profits in the fourth quarter, Cronos Group still made operating losses in the second quarter of fiscal 2019 ended June 30, 2019.
What does this mean for pot stocks in general?
The aforementioned Aphria and Cronos are but two examples of the general trend in the marijuana industry. Critics of the industry claim that pot stocks and market growth expectations were too optimistic.
The marijuana industry is expected to reach a valuation of $66.3 billion by 2025 in North America and up to $100 billion worldwide.
Critics couldn’t be further from the truth, however, as over $10 billion was invested in 2018 in North America, with funding through 2019 expected to reach $16 billion.
Public marijuana companies raised $394.1 million in January 2019 alone. This amount is in line with the estimated CAGR of 24.1%, demonstrating that the industry’s growth was not overly optimistic.
To get the real picture of pot stock performance, you would need to look at the past couple of years. Looking at the stock prices from last summer, both APHA and CRON stocks have increased in value.
The recent decrease in stock price can therefore be attributed to volatility in the markets and lack of investor confidence. As for the losses recorded by cannabis companies, these were because of acquisitions by these companies that put a dent in cash flow.
Should you invest?
Looking at price charts of cannabis stocks on the TSX, most of these companies experienced a spike around the start of the calendar year in response to the legalization of marijuana in Canada and the subsequent hype.
Current declines in stock price are thus due to market correction, as these stocks achieve actual valuation. Now is therefore the time to buy pot stocks because of obtaining real valuation, in short, they can only go higher.
