Will Cannabis Stocks Ever Recover?

The idea of these pot stocks creating meaningful shareholder value seems a distant dream.

| More on:
Cannabis stocks have fallen.
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Pot stocks had a terrible 2021. Sadly, the current year is turning out to be even more brutal for them so far. With never-ending snags and waning prospects of U.S. legalization, cannabis investors may not get a respite anytime soon.

Once investor-favourite Aurora Cannabis (TSX:ACB)(NYSE:ACB) is trading below $5, its all-time lows. It has fallen 67% in the last 12 months, lagging peers. Canopy Growth (TSX:WEED)(NYSE:CGC) is no different. It has lost 80% in this period and is among the top losers.

No respite for pot investors

Top cannabis players tried to entice Canadian consumers with recreational marijuana derivatives in the last few years. Cannabis 2.0, which brought a flurry of vapes, gums, and beverages, failed to stabilize their top lines. Saturated markets and comparatively slow-growing demand led to a significant cash burn for these companies.

Aurora operates through two segments; medical and consumer cannabis. While the medical segment has seen decent growth recently and boasts a leading share in Canada, the recreational space has seen a steady decline in revenues.

The company has been working on operational and supply chain efficiencies to save costs. However, it has failed to achieve positive EBITDA for several quarters.

The only thing that’s consistently increased in the case of Aurora is its outstanding shares. Equity dilution is one major problem for its existing shareholders.

Aurora had a total of 10.8 million shares outstanding in 2016, but the number went up to 198.2 million shares by December 2021. Existing shareholders’ stake becomes less valuable when the company issues new shares.

Aurora could take years to turn its bottom line green. So, even though the stock has been falling, it does not make it attractive from a valuation perspective.

Although Aurora aims to turn EBITDA positive, driven by cost savings soon, a bigger market share and faster revenue growth could be necessary to create a meaningful value for shareholders.

Canopy Growth stock at all-time lows

Canopy Growth stock also had a similar movement of late. It is currently trading close to $9, its five-year lows. Horizons Medical Marijuana Life Sciences ETF is also trading at its all-time lows and has lost 60% since last year.

Canopy Growth aggressively launched cannabis derivatives in early 2020. Its Tweed Fizz beverages gained remarkable ground last year, while gummies under the brand name Deep Space are its recent edibles attraction.

In the last 12 months, Canopy Growth reported a net loss of $427 million on total revenues of $557 million. Despite the product innovation and a diversified offering, Canopy Growth is not far away from where Aurora is on the financial front. It is still a long way from reporting a net income.

Thus, U.S. legalization could open up an ocean of opportunities for these struggling marijuana players. At the moment, 37 states in the U.S. have legalized the medical use of cannabis, while 18 states have legalized recreational use.

Bottom-line

Because of the lower revenue growth visibility, the cannabis space remains a risky play at the moment. Even though they created massive value during 2016 and 2018, now it seems a distant dream for pot investors to see stocks repeat that history.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Cannabis Stocks

A person holds a small glass jar of marijuana.
Cannabis Stocks

Canopy Growth Stock Jumps 20%: Here’s What Happened

Canopy Growth stock (TSX:WEED)(NASDAQ:CGC) popped 20% on Monday from an announcement made by another cannabis producer.

Read more »

Retirement plan
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Companies such as Brookfield Asset Management have the potential to consistently beat the broader markets and deliver stellar returns to…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Cannabis Stocks

TFSA Investors: 2 U.S. Stocks I’m Never Selling

Canadians looking to diversify their portfolios and gain exposure to U.S. stocks can purchase shares of high-growth companies such as…

Read more »

A cannabis plant grows.
Cannabis Stocks

Aurora Cannabis (TSX:ACB) Keeps Burning Cash as Revenue Falls

Aurora Cannabis (TSX:ACB)(NASDAQ:ACB) is still losing money. Its revenue is declining, too.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

Why Canopy Growth Stock Climbed as Much as 20% on Monday

A glimmer of hope from the U.S. Congress may lead to renewed interest in marijuana investing.

Read more »

TSX Today
Cannabis Stocks

TSX Today: What to Watch for in Stocks on Friday, July 15

A continued selloff in metals prices is likely to pressure the commodity-heavy TSX Composite benchmark at the open today.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

With the Cannabis Industry Trading Ultra-Cheap, Organigram Stock Looks Like a Screaming Buy!

After selling off for years, Organigram stock now offers tonnes of value and is easily one of the best cannabis…

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Canopy Growth Stock: The Only Cannabis Stock to Consider Long Term

The cannabis stock industry remains an incredibly high risk one, but Canopy Growth (TSX:WEED)(NYSE:CGC) stock provides the best opportunity for…

Read more »