Markets have reacted poorly to the recent financial results released by major cannabis companies. Canopy Growth Corporation (TSE: WEED) was just one of many businesses that saw its shares fall significantly, around 13% today after reporting earnings that included a revenue decline.
While analysts are disappointed in the results, many feel that expectations have been artificially inflated to such a level that even solid financial performance (Canopy’s stocks are still up 30 percent this year) won’t satisfy.
Canopy Growth CEO Bruce Lipton was one of those voices, arguing that the rapid enthusiasm for the cannabis market is creating a bubble. “For sure there’s a marijuana bubble,” he said, according to Yahoo Finance. “I don’t know somebody who’s not talking about it. And I don’t know somebody who isn’t putting out a press release that says they’re in the business. And when they put the press release out, their company is worth half a billion dollars.”
Like many executives, he was quick to stress the importance of fundamentals, such as production capacity, brand awareness, and other factors, knowing full well that coasting on what could be a temporary wave of excitement is a poor foundation for long-term success. “We have about four-and-a-half million square feet of production in Canada,” adding that they’ve received over $4 billion from outside investors Corona and Modelo. “So I would say there are very good companies inside the bubble, but dissimilar to how probably Google was perceived in that bubble.”
Overall, Canadian marijuana producers have seen their stock values plummet as investors receive less than stellar financial results. Aurora Cannabis Inc (TSE: ACB)(NYSE: ACB), despite reporting a 333% increase in sales from a year ago, said it’s NYSE stock fell over 15% since Monday.
Tilray Inc (NASDAQ: TLRY) fell 10 percent in today’s trading session, also despite a 86% increase in overall sales. Cronos Group (TSX: CRON) even reported a net loss of $7 million, a massive drop off in comparison to last year. This was in spite of sales rising over 186% during the same period.
Canopy Growth had its own issues to report. The firm reported C$23 million in their most recent quarter revenue today, a 33% increase from a year ago, but 10% lower from last quarter, as reported by Barrons. Lipton went on to attribute this decline to a slowdown in demand for medical use, along with a slowdown in deliveries to their main European market, Germany. He also went on to write of their rather narrow gross margins to start-up costs and unused production capacity.
“Provinces are screaming, ‘Get me product,’” he said. “That craziness for the first 30 days is starting to become a predictable model.”
Cannabis stocks have been expensively priced according to traditional financial metrics, such as price-to-earnings and price-to-sales ratios. Much of this was due to an excited investor base, eagerly looking at cannabis markets as the next great opportunity.
However, as time goes on it seems that investor enthusiasm is fading, as many begin to wonder whether the market has reached its peak – similar to Bitcoin’s historic surge that took the cryptocurrency up to $25,000 in December before crashing. Which many companies trading at over 100 times their sales, it’s not hard to see why some people think this might indeed be the case.