While it has been a great month for cannabis stocks, long-term shareholders are still staring at big lifetime losses and bigger questions.
At this stage, decriminalizing cannabis nationally, or even internationally, isn’t going to change the math driving cultivators like Aurora Cannabis Inc. (NYSE:ACB) and Tilray Corp. (NASDAQ:TLRY).
They’re selling as much dried plant matter as they can. They’re charging what the market will bear. But they just aren’t making money at this scale.
And for various reasons, demand isn’t growing as fast as it did when the recreational market first opened up. Early adopters across North America are already regular customers and their consumption is built into corporate revenue.
That’s not the growth proposition that gave these stocks so much blue-sky buzz when the boom was new. Cannabis investors now see a more sober landscape dominated by business considerations: profit margins, cash flow and balance sheets.
On that level, most of the group seems to have recovered Wall Street’s confidence. Refined business models like the ones that drive Green Thumb Industries Inc. (OTC:GTBIF) and GrowGeneration Corp. (NASDAQ:GRWG) are on track to beat just about everything on the market this year.
Even stocks on the pot periphery like Scotts Miracle-Gro Co. (NYSE:SMG) are beating Silicon Valley giants like Apple Corp. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN).
But TLRY, and especially ACB, remain under a heavy cloud that a good month hasn’t overcome. In theory, TLRY has a happier ending. Management promises that quarterly losses will end this quarter.
That’s a bit of a surprise. Wall Street still projects that the company will burn about $375 million before finally achieving profitability in 2023. With $155 million in cash and a total of $304 million in current assets, that’s a road to oblivion.
If TLRY starts making money, its long-term survival odds will improve dramatically. Otherwise, the stock will mostly attract speculators.
ACB, on the other hand, is actively selling stock to extend its timeline. While the company has $420 million in assets on the balance sheet, only $162 million of it is in cash. Consensus expects a $245 million burn between now and a potential profit point four years away.
That’s a long time to wait for clarity that the business model actually works. And, while a recently announced $500 million stock sale will keep the company liquid, we’ve already seen a lot of dilution here.
ACB has already expanded its share count from 47 million in 2018 to 115 million today. The next sale looks like it will take the float beyond 165 million shares, quadruple where it was two years ago.
Meanwhile, the stock has crashed, which means that investors are chasing four times as many ACB shares as they were in 2018 at no more than 1/6 the price.
If demand for ACB had kept up with supply, there would be no problem. But as it is, there are too many shares and not enough cash flowing through the company to hold up the price.