The global cannabis industry is widely considered one of the biggest investment opportunities of the decade.
According to BDSA, increased legalization of both medical and recreational cannabis use led consumers to spend more than $25 billion in 2021. By next year, the once-fringe market is forecast to expand to a staggering $37 billion.
Despite the lofty expectations and media hype, cannabis stocks have struggled mightily. In 2020, an influx of publicly traded companies and massive dilution caused a sharp downtrend. After a Covid-driven demand surge caused a temporary jump in cannabis stock prices, the downtrend took over.
Nevertheless, major global corporations continue to invest in cannabis. In the food and beverage industry alone, dozens of companies are betting on cannabis-infused drinks, gummies, and oils—Molson Coors, Nestle, and Kraft Heinz to name a few. A plethora of pharmaceutical companies focused on developing drugs and wellness products derived from cannabis compounds is another major market subset.
With so many businesses going all-in on cannabis and stock price performance fledgling, many investors have been left scratching their heads. Is it time to buy or time to be fooled again?
Let’s look at two of the most prominent cannabis stocks to see if the sea of red will ever shift to green.
Will Aurora Cannabis Stock Go Up?
Aurora Cannabis Inc. (NYSE: ACB) is the leader in the Canadian medical cannabis market and one of the top medical cannabis players globally. The grower is also a major participant in the adult recreational space with its recent acquisition of Thrive amid a shift towards premium brands.
Despite boasting industry-leading gross margins north of 50%, Aurora is operating at a substantial net loss. It is a net loss that is expected to steepen this year in the face of increased spending and ongoing challenges in the Canadian recreational market. Poorly timed capital raising in recent weeks hasn’t helped the stock either.
Looking out to 2023, things start to look better. Wall Street analysts are projecting a much narrower per share loss of $0.45 which could set the stage for profitability the following year. If Aurora Cannabis can demonstrate a sustainable move towards breakeven, this could attract more institutional money and drive upward pressure on the stock.
Until then, Aurora Cannabis will be a wait-and-see story. Management has embarked on a transformation plan aimed at cutting costs and cleaning up the balance sheet. Both efforts are showing early signs of progress.
Unfortunately, a lack of legislative movement in the all-important U.S. market is overshadowing this progress. Although President Biden has said he’d support federal cannabis legalization, the issue has yet to be a priority. Until this changes, Aurora Cannabis will likely remain in a holding pattern.
Is Canopy Growth Corporation Stock a Buy?
Canopy Growth Corporation (NASDAQ: CGC) has been weighed down by the same industry dynamics. With the stock finishing down in 16 of the last 17 months, things seemingly can’t get much worse. Or can they?
Over the last three weeks, a trio of sell-side firms have said the Canadian cannabis producer is still a sell. Last month, BMO Capital did the same and issued a daunting sub-$2.00 price target that suggests another 25% downside. The analyst expressed concern over management’s cultivation and cost savings plan in the wake of weak quarterly financial results. Last quarter, Canopy reported an 8% year-over-year revenue decline that reflected a drop in core Canadian cannabis sales.
With sales growth stagnant and an aggressive strategy to expand in the U.S. underway, Canopy isn’t expected to turn a profit anytime soon. The consensus forecast for 2023 is a $0.64 per share loss. This marks an improvement over 2022’s anticipated bottom line but shows much income statement work remains.
Like its industry peers, Canopy has a long road ahead to restore investor confidence. It must show that it can regain lost share in the Canadian recreational market by asserting its premium flower leadership and gaining traction with new vape and edible consumer products. It must also demonstrate improvement in its U.S. brick-and-mortar distribution strategy at a time when CBD stores are popping up all over the country (including in some of the most unlikely locations).
Despite the near-term headwinds, management still feels good about the long-term outlook. Cannabis regulatory reform in the U.S., Europe, and other parts of the world is its biggest growth driver. Of course, with an expanding market will come more competition, but Canopy’s early mover advantage and portfolio of popular brands should ultimately make it a winner. More short-term pain is probable, but the long-term gains are still ripe for the picking.