Steer Clear: This Stock Spells Trouble

A newly listed cannabis stock is outperforming in 2024 but investors should stay clear to avoid trouble and losses.

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Pot stocks are a riskier investment

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North America dominates the marijuana industry with more than 80% market share. Statista.com projects a compound annual growth rate (CAGR) of 14.6% in five years, with a corresponding volume of around US$102.9 billion by 2028.

While the global market size is growing at an accelerating pace, prominent cannabis stocks have nothing to show but losses. Canopy Growth (TSX:WEED), Aurora Cannabis (TSX:ACB), and Tilray Brands (TSX:TLRY) have lost between 85% and 99% in the last three years. As of this writing, all three names are also losing year to date.

Only Curaleaf Holdings (TSX:CURA) stands out and outperforms the TSX thus far in 2023, up 31.22% versus 2.17%, respectively. However, like its industry peers, this cannabis stock has a negative return of 65.6% in three years. The market-beating year-to-date gain is enticing, but staying clear is better unless you’re prepared to lose your investment.

Business performance

Curaleaf is New York-based and not a Canadian firm. The stock debuted on the TSX on December 14, 2023. The $5.3 billion company has 147 local dispensaries, 21 cultivation sites, and is present in 17 states. Based on its investor deck, the cannabis producer and distributor is well-positioned to become a global industry leader because of its footprint in the U.S. and international markets.

Management believes Curaleaf has multiple levers to expand profitability and increase cash generation. In the first three quarters of 2023 (nine months ending September 30, 2023), total revenue increased 7% year over year to a record US$1 billion. In Q3 2023, revenue increased 2% to US$333.2 million versus Q3 2022.

According to its Executive Chairman Boris Jordan, Curaleaf took the final steps in its asset optimization plan during the third quarter. Besides the revenue growth, free cash flow (FCF) from continuing operations reached US$33 million, while cash on the balance sheet was US$118 million.

Growth catalysts

Jordan looks forward to an exciting 2024 following a strong ending in 2023. Moreover, he is upbeat about the coming state and regulatory catalysts and the listing on Canada’s primary stock market. Jordan also notes the early mover advantage in Europe.

Curaleaf’s CEO, Matt Darin, describes the last two quarters as an important evolution for the company. Management reduced the expense structure significantly and scaled back production to accelerate the right-sizing of inventory. He adds that Curaleaf is on the offensive with its innovative new and expanded product offerings.

New York, Ohio, and Germany are growth catalysts, not to mention the market potential in Florida and Pennsylvania. The company opened the newly renovated state-of-the-art Curaleaf Phoenix Airport dispensary in a new location last week.

Curaleaf’s current share price of $7.23 appears to be a good entry point. However, look at the bottom line before investing. After three quarters in 2023, the net loss ballooned 96.8% year over year to US$224.7 million.

Trouble ahead

Curaleaf is one of the leaders in the American cannabis industry, but the headwinds are strong and dangerous. Mounting losses have been the story for most cannabis companies, and Curaleaf is not an exception. The net losses have been consistently growing in the last three years. Profitability remains in doubt despite the grand plans and growth catalysts. Thus, from an investment perspective, Curaleaf spells trouble.   

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.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.

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