Don’t Bet on Cannabis Stocks

The global cannabis industry is undergoing a massive rationalization. Similar to what occurred after the dotcom bubble burst in 2000, that will see many cannabis companies fall by the wayside; they’ll either be acquired by larger competitors or cease to be going concerns. It is those cannabis companies with weak balance sheets that are bleeding red ink that are the most vulnerable.

That vulnerability is being magnified by the coronavirus pandemic, which has forced the closure of many dispensaries. The pandemic is also making it even more difficult for marijuana companies to access capital in an industry starved of funding.

There are also signs that the global legal cannabis market is not as large as originally believed. Some analysts put the total market value at somewhere around US$40 billion by the end of 2023. The expansion of world demand for legal cannabis and derivative products is threatened by the reluctance of many jurisdictions to fully legalize its medical and recreational use.

This bodes poorly for the earnings of cannabis stocks, which is a bad omen for an industry struggling with profitability.

For its fiscal second quarter 2020, HEXO reported a $298 million net loss, which was around 75 times greater than its $4 million net loss a year earlier. That was despite revenue from sales soaring 47% year over year to almost $24 million. The large loss can be blamed on significant impairment charges against HEXO’s intangible assets and goodwill, which totalled $218 million for the quarter.

A culmination of ongoing losses and concerns over liquidity saw HEXO management issues a statement warning that the business may not remain as a going concern, unless it could raise additional funds. HEXO flagged that it lacked enough capital to meet funding requirements for debt, operations, and working capital requirements.

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