The cannabis sector is running high on negative sentiment after two of its biggest players, Canopy Growth and Aurora Cannabis, reported disappointing earnings yesterday.
Cannabis demand warning
In its latest quarter, Aurora Cannabis reported a 25% decline in net revenue compared to the previous quarter. The consumer cannabis segment’s net revenue fell about 33%. This decline speaks volumes about consumer demand for cannabis. In another instance, Canopy Growth (WEED) (CGC), which released its earnings results on November 14, reported a mere 6% rise in revenue from the previous quarter.
The question is how a booming industry can show such anemic sales. It certainly doesn’t demonstrate strong demand and raises questions about future growth prospects.
If we dig deeper into these companies’ earnings releases, we can find more clues about the demand situation. In its press release, Canopy Growth stated, “Provinces have reduced purchases to lower inventory levels.”
In another instance, Aurora Cannabis stated that it would reduce its “capital investments over the next several quarters by over $190 million to better match near-term capacity expansion with anticipated demand.”
Companies usually scale back their expansion plans when they alter their views about future demand. Of course, these decisions are made based on information that is available to insiders. Nonetheless, the decision to scale back expansion is a strong enough signal for the market that future sales won’t be as strong as once anticipated.
Canopy Growth’s CEO, Mark Zekulin, however, pacified investors by saying that “conditions are a short-term headwind in what is a brand-new industry.”
Pricing in the future
Current stock prices include future expectations. Therefore, the decline in cannabis stock prices is, in effect, the pricing in of future weakness. Investors who bought in at high valuations may have to be patient until things turn around. Unfortunately, there’s no crystal ball to show us when that will be. The US and the world markets have yet to welcome the cannabis industry.