The stock market’s marijuana boom is over. And for the once high-flying cannabis industry, a euphoric dream of never-ending growth has turned into a survival nightmare as it navigates through the bust.
The comedown has been brutal, with the largest exchange-traded fund tracking the legal weed industry, the AdvisorShares Pure US Cannabis ETF, trading for around $2.37, down 96% from the closing high of $55.05 it hit in February 2021. But the reason it happened is pretty simple.
The business kicked into gear in 2018 when Canada legalized marijuana for recreational use, with the US expected to follow along shortly. Wall Street bankers assumed they were living through the end of America’s second Prohibition and they were determined to cash in.
But while a few dozen US states legalized weed, the push for a national law largely stalled out. Now, some states, like Texas, are ready to ban all recreational weed products. And with President Donald Trump in the White House, the likelihood of America legalizing pot nationally anytime soon seems remote.
“There’s been this carrot that’s been dangling in front of this industry for so long, and it’s been a mirage,” Roth Capital Partners analyst Bill Kirk said in an interview. “If the carrot’s there, it’s rotten at this point. No one’s chasing it anymore, no one believes it’s going to come to pass.
In Canada, where the industry is primarily located, the pain is particularly acute. Tilray Brands Inc. had a market capitalization of almost $20 billion in 2018 shortly after the Ontario-based cannabis producer went public. It’s now less than $500 million.
The company’s US-listed stock, which hit an intraday high of $300 on Sept. 19, 2018, is trading for around 40 cents. And its Canadian-listed shares are the worst performers in the S&P/TSX Composite Index this year, losing 71%. S&P Dow Jones Indices announced on Friday that the Canadian shares would be removed from the benchmark in late June.
‘Growth Didn’t Materialize’
The situation has gotten so dire that Tilray shareholders are set to vote for a reverse stock split of between a 1-for-10 and 1-for-20 on Tuesday just to get the company’s US share price back above $1 and maintain its listing on Nasdaq.
“It was a hype, I mean it’s obviously unsustainable,” said Frederico Gomes, an analyst at ATB Securities. “That growth did not materialize, it didn’t materialize in Canada, it didn’t materialize in the US because people were also expecting that it would get a movement in terms of legalizing cannabis in the US that did not happen. And it hasn’t really happened as well in the international markets.”
The lower equity valuations are justified due to the weak fundamentals and the companies’ lack of growth and poor prospects ahead, Morningstar Investment analyst Kristoffer Inton said in an interview.
“Nobody’s making money,” Inton said. “You’re essentially investing in companies that would probably be like venture stage or still private because they’re so risky.”
To heighten the pressure further, public cannabis producers also have around $2.6 billion of debt maturing in 2026, according to a May report from Viridian Capital Advisors. For the industry to survive, a wave of consolidation may be in order. Pot companies could be targets for private equity roll-ups to create a few stronger competitors, Bloomberg Intelligence analyst Kenneth Shea said.
“There’s too many competitors chasing too few dollars,” he said. The risk, however, is there’s so much uncertainty about the payoff because of the inefficiencies created by the regulatory environment, he added.
Cash Challenges
For example, companies operating in the US can only sell in-state grown weed to some markets, making it difficult to mass produce and generate the best returns. Also, its illegal status in the US makes it difficult for the companies to borrow money and limits the number of institutional investors in the sector.
Read more at Yahoo Finance
