Analyst warns that Canadian cannabis stocks will see a big decline

Canadian cannabis stocks

Back in 2018, investors and analysts alike were enthralled at the potential of the Canadian cannabis industry. Many research groups had put forth aggressive estimates which predicted an exponential increase in market size, easily reaching tens of billions of dollars within a couple of years.

However, now it seems that investor sentiment surrounding the explosive potential of the cannabis space has reversed. One major Canadian analyst has warned that he thinks Canadian cannabis stocks will see a significant decline as the industry’s growth potential has been over exaggerated.

Canadian Imperial Bank of Commerce (CIBC) analyst John Zamparo published a note to his clients on Tuesday where he warned that current revenue projections and earnings estimates from other analysts for many top cannabis stocks were “unachievable.” He is one of the first major analysts to warn that the marijuana sector might not be as promising as many other experts initially figured it to be.

“It’s a fair observation that consensus estimates include international revenues, whereas our estimates do not. But the point remains that for many stocks — mostly outside our coverage universe — expectations are incredibly aggressive,” Zamparo wrote in his report according to BNN Bloomberg. “Those without strong enough balance sheets to get through what could be an elongated sales ramp, or without a differentiated strategy, could see operations halted or have their businesses bought for pennies on the dollar.”

He goes on to argue that cannabis sales could top out at $2.2 billion in 2020 and $3.3 billion by 2021. This is substantially lower than most other analysts, with the consensus estimate being closer to $6.5 billion in 2020 and $7.5 billion in 2021.

Considering the fact that back in 2018, many had expected Canada’s legalization to be, for the most part, a resounding success. The fact that cannabis stocks ended up falling significantly in Q4 2018 definitely was a surprise to most analysts. In this way, Zamparo might be right after all in saying that most analysts are grossly overestimating just how high cannabis stocks can go in the future.

Already investors have seen some of the industry’s most respected companies fall from grace. Canopy Growth Corp (NYSE: CGC) saw its shares plunge significantly after it suddenly fired its well-known CEO Bruce Linton, igniting a wave of concern from the community. Since then, the company announced that it had suffered an unexpected $1 billion loss in the recent quarter, news which sent shares plummeting.

Aurora Cannabis (NYSE: ACB) was the next major name to fall. Shares took a big hit when the company announced that not only were they not profitable in the recent quarter (contrasting their earlier released guidance which suggested they were going to be profitable) but also that they wouldn’t see positive earnings until 2020.

By this point, short interest in the cannabis giant had reached a record point as doubts had been growing about the company. In light of this announcement, it seems that this skepticism from short-sellers had been justified.

Overall, the state of the cannabis market seems to have changed significantly from last year. While investors were quite optimistic going into Q4 2018, now they are far more reserved and cautious in light of these recent stock declines. It wouldn’t be surprising to see more analysts in the future change their tune and join Zamparo’s side.