Over the next decade, you’d struggle to find an industry that offers the growth potential of legal cannabis. Unlike new technologies, cannabis has been around for a long time and is a proven industry – at least in the black market, where tens of billions of dollars in sales are conducted each year. It wouldn’t be all that difficult for the marijuana industry to continue shuffling consumers from the black market to legal channels over time.
Just how big could the cannabis industry become? Although estimates vary quite a bit on Wall Street, the consensus is that marijuana offers a double-digit compound annual growth rate over the next decade, with one investment bank calling for as much as $200 billion in sales. That’s not the type of growth investors are going to overlook.
But as we learned from the dot-com bubble in the early 2000’s, valuations are about more than just revenue growth. At some point, earnings actually start to matter, and we’ve begun witnessing that shift in the cannabis industry. When many of the most popular pot stocks, such as Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON), and Tiray (NASDAQ:TLRY), lift the hood on their quarterly performances, Wall Street and investors pay close attention.
Although operating profitability (sans one-time benefits) is pretty much out of the question for these popular pot stocks in 2019 – Cronos will likely be profitable in 2019 as the result of a non-cash unrealized gain on the revaluation of derivative liabilities – and perhaps even in fiscal 2020 as Canada continues to work through supply kinks, the focus turns to 2021. Will 2021 be the year that cannabis stocks finally deliver on the earnings front?
Canopy Growth may be the largest marijuana stock in the world by market cap, but that hasn’t saved what’s arguably the most visible cannabis stock from some recent tumult. This month we’ve witnessed the firing of former co-CEO Bruce Linton, and learned from CFO Mike Lee that there’s a very real possibility that Canopy won’t hit its own previous guidance of 1 billion Canadian dollars in 2020 revenue (Canopy runs on a fiscal year that ends on March 31). Following this weaker guidance, Wall Street is now pricing in a greater than CA$1 per share loss in 2020, and has reversed its forecast for a 2021 profit of CA$0.31 per share just a month ago to a consensus loss of CA$0.37 per share.
Even though Canopy Growth is one of the lucky few growers that’s been able to get a good portion of its cultivation space licensed by Health Canada, supply concerns are likely to be persistent for many quarters to come. Newly implemented rules for submitting grow-license applications should help Health Canada reduce its more than 800-license backlog, but it doesn’t change the fact that fewer than 200 total licenses have been issued in over five years. These changes are likely to take time to implement, and with Canopy reliant on the recreational side of the market, it’ll be particularly vulnerable to these supply chain issues.
Canopy’s acquisition spree, and the long-term-vesting shares that Linton gave to employees in order to improve retention, could be troublesome as well. Integration costs tied to acquisitions and share-based expensing could ensure that Canopy Growth is one of the last marijuana stocks to turn the corner to profitability.