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Cannabis Earnings Roundup: Record Sales, But Concerns Remain

November 14, 2018 2:30 pm
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Cannabis Earnings Roundup: Record Sales, But Concerns Remain

The four largest cannabis companies in Canada — Aurora Cannabis Inc (NYSE:ACB), Canopy Growth Corp (NYSE:CGC), Tilray Inc (NASDAQ:TLRY) and Cronos Group Inc (NASDAQ:CRON) — have all recently reported quarterly financial results. Even though the results were mostly positive and showed large top-line growth due to higher cannabis sales, investors weren't particularly excited and the stocks inched lower following the results.

There are many factors that explain why the market reacted to the earnings the way it did.

For one, there's a popular opinion on the Street that cannabis stocks are overvalued and their valuation doesn't reflect the potential of the Canadian cannabis market even after the full legalization.

In addition, all but one company reported net losses for the quarter, as they had to spend more on marketing and sales ahead of the legalization. The only company with a positive bottom line was Aurora Cannabis, and the bulk of its earnings was non-cash and came from investments in other companies.

2 Companies Saw Higher Cost Per Gram

Among the four companies, the largest revenue growth was registered by Aurora, whose revenue surged 250 percent to $29.7 million. Aurora also saw an increase in cost per gram during the third quarter. The average net selling price of cannabis was $9.19 per gram for the first quarter of fiscal 2019, up 12 percent on the year.

The only other company that recorded an increase in average cost per gram was Canopy Growth, which saw the price appreciate to $9.87 from $7.99, an increase of 24 percent on the year.

On the other hand, Cronos Group and Tilray saw the average price per gram decline.

Cronos Group's average price slid to $7.32 from $8.01 in the third quarter of 2017. During the earnings call, Cronos' CFO William Hilson said the decrease was due to a shift in products sold to the four provincial governments to wholesale. Tilray in its earnings release also said its average selling price fell to $6.21 from $7.53 because a larger share of revenue came from bulk sales.

More Revenue, But Also Higher Costs

Another concern that might have spooked investors are the larger expenses the companies incurred, particularly sales and marketing.

While Aurora saw revenue up by 250 percent, its sales and marketing expenses doubled to $29.38 million. Canopy Growth's fiscal second-quarter revenue advanced by 33 percent on the year to $17.6 million, but marketing expenses surged to $39 million from $7.6 million. Tilray and Cronos Group saw sales and marketing expenses grow by 138 percent and 240 percent, respectively, while revenue appreciated by 85.5 percent and 186 percent, respectively.

Higher sales and marketing, as well as general and administrative expenses could be due to the companies' large investments ahead of legalization and in the future these costs might be lower.

"[…] the scope of marketing has been significantly curtailed pursuant to the Cannabis Act as of Oct. 17, so going forward we expect our sales and marketing expenses to be quite a bit lower until regulations change if and when they do," Glen Ibbott, Aurora's CFO said during the earnings call.

What's Next

The companies' next reports will be mostly focused on the impact of legalization. Given that Canada is facing a supply shortage of cannabis, large pot companies are expected to grow their production capacity and sell everything they produce. However, there is also a risk that as companies ramp up production, they could reach an oversupply stage in the next couple of years.

Large cannabis companies are also starting to look abroad for further expansion and their outlook also depends on the state of the cannabis industries in Latin American and European markets.

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