It is getting very unpleasant in the cannabis stock space. Although this sector has an enormous growth potential, similar to the blockchain space and the electric vehicles industry, the stock prices of cannabis stocks are about to show a different story right now. Looking at the market leader, Canopy Growth (WEED.TO), it is in the process of a breakdown out of 3.5 year rising channel. This might be major, and next week will be decisive.
As said, we choose one market leader per sector through which we track the sector itself. For the cannabis space it is Canopy Growth.
Canopy Growth published earnings on Thursday after the bell.
This is what looked great:
- Achieved annual net revenue growth of 191% to $226.3 million. Generated $140.5 million of gross revenue from new Canadian recreational channel and $78.9 million in global medical sales.
- Fourth quarter revenue growth of 13% versus third quarter with additional revenue being generated through value-added products, extraction services, and clinic partners.
- Shipped 24,300 kilograms and kilogram equivalents during the fiscal year, including 16,300 kilograms of dry flower and 8,000 kilogram equivalents of oil and softgels.
However, this is the most disturbing part: Adjusted EBITDA amounted to a loss of $257.0 million in fiscal 2019, as compared to a loss of $36.1 million in fiscal 2018. The year-over-year loss is largely reflective of the investments made in fiscal 2019 sales and marketing, and general and administration costs as described above.
Investors did not like this, rightfully so, and dumped the stock. It lost 7.6 pct on Friday.
Management sold this story of employees deserving stock compensation. Half of their recent loss is attributed to employee stock compensation. While the vision of the management may be true they may face the consequences by investors … and if there is one big difference between investors and employees is that investors don’t fool with them and can ‘kneel down’ a company with the consequences of massive selling.
All this happened at a time when the stock was already suffering from the start of a breakdown. We are now in week 3 of the breakdown process. It is now or never for Canopy Growth: if it does not recover by the end of next week it will be a formal breakdown. This would be major!
We may sound negative, and we are not necessarily saying that the bull market ended right here right now. We may look at a consolidation before a new bull market resumes, we cannot know at this point.
Anyhow, the next week will determine if our forecasts for the sector continue to be valid … or they will be invalidated. This includes:
- A Canopy Growth Stock Forecast for 2019
- An Aurora Cannabis Stock Forecast for 2019 of 75 USD
- An Emerald Health Therapeutics Stock Forecast for 2019
But the sector has used way too much shareholder value to fund its growth, and that’s our biggest criticism on several of these cannabis companies.
Similarly, Aurora Cannabis, another bellwether stock in this space, is testing critical support. This one is from a 2 year uptrend.
Figures from Aurora Cannabis are solid though, but if the sector goes down it takes all fundamentally good performing stocks with it. There is hardly any exception to find if a sector breaks down.
The million dollar question is: was this the final peak of the cannabis sector or is this a wake-up call for the companies to get their act together and pay attention to shareholders?
We are conducting a deeper research, and will report back in the next days.