It’s no secret that publicly listed cannabis companies are expensive. With price-to-sales ratios north of 20, many of them are among the priciest stocks on the TSX.
Obviously, such a sky-high valuation is tough to justify. And while TLRY’s price has come down, it’s still more expensive than the vast majority of TSX stocks.
Traditionally these high valuations have been justified by revenue growth rates — which in the marijuana sector can reach as high as 969%. However, that justification may not work forever, as you’re about to see.
A high revenue growth rate doesn’t mean much if the government can cut off your revenue source.
In August, the company was found to have grown up to 5,000kg worth of marijuana in unlicensed rooms, which caused Health Canada to put a hold on 5,000kg of the company’s product. Then, the company pre-emptively put a hold on another 7,500kg of its own cannabis. Finally, Health Canada discovered even more unlicensed growing, and suspended the company’s license.
At this point, it’s become incredibly difficult for CannTrust to sell its product. Although Health Canada has stopped short of permanently revoking the company’s cannabis license, during the suspension period it will be as if that were the case. And what happened to CannTrust, could in theory happen to any other cannabis grower — particularly with increased regulatory scrutiny on the entire industry.
A final point worth mentioning is the fact that cannabis companies are suffering from a persistent lack of profitability.
Although it’s normal for early stage growth companies to lose money, many of the top marijuana companies aren’t that young anymore, and they’re still not profitable.
These glimmers of hope we’re seeing are not an established trend, but they’re nonetheless encouraging. If top marijuana producers keep slashing their operating losses, then maybe consistent profitability will become the norm. Let’s just hope that impairment charges don’t ruin it in the short term.
AndrewButton has no position in any of the stocks mentioned.” data-reactid=”48″>Fool contributor AndrewButton has no position in any of the stocks mentioned.
Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019” data-reactid=”49″>The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019
Recent Comments