Marijuana stocks fell Monday as Cowen downgraded Aurora Cannabis stock and Tilray, but kept Canopy Growth stock as its only "outperform" rating, amid ongoing supply and cash difficulties in Canada's legal recreational rollout and better prospects in the U.S.
In a research note on Monday, Cowen analyst Vivien Azer said issues that have hurt the industry — too few stores to sell weed, difficulty bringing illicit-market customers into the legal market — "do not appear to be fading as anticipated." Newer legal products, like edibles and vapes, are "likely not the elixir that the market was hoping for," she said.
Factoring those issues together, Cowen also slashed its full-year sales forecast by 32% to 3.5 billion Canadian dollars ($2.63 billion) in legal cannabis sales.
The assessment arrives as Canada's big producers try to pick up the change after a rush to borrow money, spend money and expand at a breakneck pace. The industry has laid off staff, tamed its global ambitions, rethought production capacity and appointed leaders with a little less swagger.
Problems For Marijuana Stocks
As of January, there were 699 dispensaries across all of Canada, Cowen said. However, the two most populous Canadian provinces, Ontario and Quebec, had 48 shops combined. The thin supply of stores has hindered legal access.
Meanwhile, some Canadian pot producers have launched cheaper weed brands in an effort to steer customers toward legal purchases. Illegal pot has generally sold much cheaper than legal product. Cowen has said that the price gap between the two has stretched as wide as 80%.
But the influx of "value" weed brands, Azer said, has created a "bifurcation toward either value- or premium-priced flower with a glut of midpriced inventory." Meanwhile, newer products have appeared on store shelves more slowly than expected.
Aurora Cannabis closed down 7.2% in the stock market today, Canopy Growth lost 7.2%, and Tilray stock tumbled 10.7% amid a broad sell-off sparked by coronavirus pandemic fears.
Among other marijuana stocks, Cronos Group stock dived 11%. The company on Monday said it would delay its fourth-quarter earnings report, which had been set for Thursday. Aphria stock sold off 5.3%.
Aurora Cannabis Stock: 'Right-Sizing' Needed
Azer downgraded Aurora Cannabis stock to market perform from outperform. She said Aurora needed to "right size" its production capacity, estimated to be around 120,000 kilograms. But that was still more than three times annualized volume sales the company reported in its fourth quarter.
Aurora has halted development of its Aurora Sun facility, announced layoffs for hundreds of employees and the departure of its onetime CEO, and forecast massive write-downs. It has also hit the pause button on other plans to widen its capacity.
But Azer said management had not quantified how much Aurora might cut capacity, relative to its onetime target of 625,000 kilograms.
She said that "with (Aurora) having more theoretical capacity than any of its peers, we think the resolution of this capacity overhang could be more painful for (the company) than most."
Azer also estimated that Aurora had around three months of cash remaining. But she noted that the cannabis producer could still tap 200 million Canadian dollars through an at-the-market stock offering, and had some 25 million Canadian dollars available to borrow.
By contrast, Cowen estimated, rival marijuana stocks have more cash on hand. Cronos Group had 140 months of cash left, thanks largely to a big investment from tobacco giant Altria. Aphria had 22 months. Canopy, whose finances have been cushioned by a $4 billion investment from alcohol company Constellation Brands, had 18 months of cash remaining.
Tilray Stock: More Proof Needed
Azer also downgraded Tilray stock to market perform from outperform. She said the company's "asset light" approach to business — in which it does less of its own growing and focuses more on end products and brands — has yet to be proven.
Azer said "a lack of ample premium flower in the wholesale market has prevented the company from taking on this strategy in Canada and forced TLRY to build incremental domestic capacity."
She also noted that Tilray's partnership with AB InBev, intended for research and development of cannabis beverages, had suffered from delays. Tilray's international medical business has yet to gain traction. The company's retail partnership with Authentic Brands Group, which would put more CBD products in mainstream retailers, had also yet to show substantive results.
Last month, Authentic Brands announced plans to launch Sports-Illustrated-branded CBD topicals — but with a company called Sentia Wellness, and not Tilray. Given that development, Azer said, "we are left to wonder how much progress has been made."
As with other cannabis producers, Tilray's cash cushion also raised concerns. She said Tilray had about 10 months' worth left on hand and would need more funding.
Canopy Growth Stock: New Leadership Helping
Among the marijuana stocks Cowen covers, Canopy remained the only one with an outperform rating. That rating was largely due to the company's new management. Both Canopy's CEO and CFO are veterans of Constellation Brands, best known as the parent company of Corona beer.
Constellation, which also controls Canopy's board, has exerted more influence over the pot producer after it turned out disappointing results, ousting co-CEO Bruce Linton in July.
Azer said the new executives at the top — CEO David Klein and CFO Mike Lee — gave Canopy "the operational rigor and corporate stewardship needed to help turn around its profitability."
Still, she raised concerns about its international business and whether it needs to shrink its overall production capacity.
