Monday was a generally calm day on Wall Street, with most major benchmarks finishing relatively close to where they started the session. Earnings season has hit its peak, with many key players in the market already having reported their latest results, and so investors have largely turned their attention to broader factors like geopolitical tension and global economic performance. However, some key stocks in the cannabis industry are set to report their quarterly results this week, and that has a lot of market participants looking critically at many marijuana companies. Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (NYSE:APHA) were among the worst performers today. Here’s why they did so poorly.
One thing to keep in mind about all of these stocks is that they’ve seen incredible runs higher to start 2019. Coming into today’s session, Canopy was up nearly 70% since the beginning of the year, and Aphria had risen more than 65%. Even bringing up the rear, Aurora Cannabis was higher by more than 50% since the end of 2018, and so even the 5% to 10% declines that the stocks suffered on Monday didn’t do more than take a modest bite out of those year-to-date gains.
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In addition, investors are about to get their first reads on how 2018 ended for cannabis stocks at a fundamental level. Aurora Cannabis is set to report its latest quarterly results after the market closes on Monday, and Canopy will follow with its own quarterly report on Thursday. Those who follow the cannabis industry are generally looking to see solid growth, but they aren’t entirely sure whether the sales gains that these companies are almost certain to experience will translate into bottom-line growth as well.
Will reality bite?
There’s no doubt that Canopy, Aurora, and Aphria all have amazing growth potential. Canopy has already used its partnership with Constellation Brands to make huge inroads in markets globally, including its latest announcement to invest $150 million toward building a hemp production facility in upstate New York. The strategic move could represent the first step toward a broader presence in the U.S. market, and investors are hopeful that as more jurisdictions in the U.S. legalize marijuana, Canopy will be able to use its ground-floor entry as a foundation on which to build further business. Aurora and Aphria have made strategic moves of their own to try to secure their positions in the budding cannabis industry, and they’ve all made household names of themselves among investors in the marijuana market.
Yet even though investors can expect revenue to have risen dramatically during the last part of 2018, the bigger question is whether these companies can make good on their longer-term strategic plans. Building up production capacity is a must, and all three of these companies have made substantial investments toward increasing their annual growing rates. Those investments should pay off with greater production and sales, but the costs of building and completing those projects have in some cases been substantial. It’ll be up to investors to decide whether these companies are giving up too much current value in pursuit of growth at any cost.
After the amazing performance that these marijuana stocks gave investors during January and early February, it’s not a big surprise to see them giving back some ground today. Much more important in the long run is whether any or all of these companies can live up to the hype and become leaders in their industry, because it’ll take a lot of success to justify the stock performance that shareholders have already enjoyed from these marijuana stocks.