Cannabis was legalized in Canada almost five years back, driving marijuana stock prices toward all-time highs. For instance, shares of Canadian cannabis stocks Aurora Cannabis (TSX:ACB) and Canopy Growth (TSX:WEED) surged 35,000% and 161,000%, respectively, between November 2013 and November 2018. Today, both these TSX stocks are trading 99% below all-time highs, wiping out significant investor wealth.
ACB stock and its peers have destroyed investor wealth
Investors, as well as marijuana producers, grossly overestimated the demand for marijuana products once recreational cannabis was legalized in October 2018. Due to this optimism, Aurora Cannabis and several of its peers expanded manufacturing capabilities at an alarming rate while also acquiring competitors at a hefty premium.
But the slow rollout of retail licences in Canada, cannibalization of cannabis sales from the illegal market, and rising competition resulted in a price war among marijuana producers. Aurora Cannabis and Canopy Growth have consistently sold products at a loss, resulting in high cash-burn rates. Further, overvalued acquisitions led to billion-dollar write-downs, making investors extremely nervous.
In the last three fiscal years, Aurora Cannabis has reported cumulative operating losses of $950 million, while this metric for Canopy Growth stands at a whopping $1.9 billion. To support these losses, both companies have raised equity capital multiple times, diluting existing shareholder wealth in the process.
Canadian cannabis producers eventually had to scale down operations to narrow their losses. Aurora Cannabis also shifted toward selling higher-margin medical marijuana products to improve the bottom line. But in the last 12 months, both Aurora Cannabis and Canopy Growth have reported negative gross margins.
Is WEED stock a buy right now?
Cannabis stocks trading on the TSX remain high-risk investments despite their depressed valuations. Armed with weak balance sheets, these companies are still reporting losses and will have to raise equity capital in the near term.
Aurora Cannabis is among the major players in the Canadian cannabis market. It also has a presence in 11 other international cannabis markets, including the U.K. and Germany. But with just $300 million in cash, the company needs to shore up profit margins at an accelerated pace.
Canopy Growth is backed by alcohol giant Constellation Brands, which invested $5 billion in the marijuana producer five years back. Canopy Growth ended the March quarter with just $783 million in cash and an operating loss of $558 million in the prior 12 months. Moreover, Canopy Growth also has to repay debt worth $468 million in the next year.
While the cannabis market continues to expand in Canada, Canopy Growth reported revenue of $87.5 million in the fourth quarter of fiscal 2023 (ended in March), a decline of 14% from the year-ago period. In fiscal 2023, its sales were down 21% at $403 million.
The Foolish takeaway
Both Aurora Cannabis and Canopy Growth may have to depend on the U.S. to legalize pot at the federal level to benefit from economies of scale. But they need to stay afloat and boost balance sheet liquidity to offset their current cash-burn rates. There are much better stocks TSX investors can consider buying right now.
