3 Cannabis Stocks That May Not Be Profitable Until 2022

Legal marijuana has been touted as one of the greatest growth trends of our generation, and between 2016 and the first quarter of 2019 it certainly lived up to that billing. With the potential for up to $200 billion in annual sales on the horizon, investors piled into pot stocks, sending many into the stratosphere.

But as has been the case with every next-big-thing investment opportunity over the past quarter of a century, the bubble looks to have burst…

The legalization of recreational cannabis in Canada was a big moment for the industry last October. Unfortunately, it now means that operating results actually matter. With growing pains clearly coming into play as the pot industry matures, it’s become painfully evident that many cannabis stocks aren’t profitable on an operating basis.

Thankfully, a vast majority of pot marijuana stocks should become profitable in 2020, or perhaps 2021. However, three cannabis stocks stand out for all the wrong reasons. Consider the following three companies unlikely to generate a recurring operating profit (i.e., without the aid of one-time benefits or fair-value adjustments) prior to 2022, at the earliest.

Canopy Growth

Canopy Growth (NYSE:CGC) may be the largest marijuana stock in the world by market cap, but that doesn’t mean this leading cannabis company is anywhere near becoming profitable. In fact, among major growers, it might be the last to generate a recurring profit.

For years, Canopy Growth’s management had a grow-first mentality. In other words, much like the dot-com stocks of the late 1990s, Canopy prioritized acquisitions and international expansion opportunities that focused on gobbling up as much early-stage market share as possible, all while paying little heed to operating expenses. While promises buoyed pot stocks for a while, that’s not the case anymore.

According to the company’s first-quarter operating results, it lost more than 1 billion Canadian dollars, although a significant portion of this loss was tied to the one-time extinguishment of warrants. Backing out all of these one-time benefits and costs, including fair-value adjustments, we find a company that generated a meager 15% gross margin in Q1 2020, just CA$13.2 million in gross profit, and saw operating expenses more than triple to CA$229.2 million.

Ultimately, Canopy’s free-willed spending cost co-CEO Bruce Linton his job, and it’ll eventually do the same for current CEO Mark Zekulin, once a suitable permanent replacement is found. That’ll leave Canopy Growth without its visionaries and with no clear plan as to how it’ll tighten its belt. With Wall Street’s loss estimates widening, it looks unlikely that Canopy will generate an operating profit anytime soon.

Tilray

Another cannabis stock that’s been a certifiable disaster come earnings time is Canadian grower Tilray (NASDAQ:TLRY).

When Tilray went public and moonshot to $300 a share (a $26 billion valuation) in September 2018, it brought back memories of the internet boom. Since then, Tilray’s share price has fallen by more than 90%, and a quick look at its operating result will show why.

In mid-August, Tilray delivered its second-quarter results, producing a relatively menial gross margin of 27% and a wider-than-anticipated operating loss of $32.5 million (Tilray reports in U.S. dollars). Gross margin has been a particularly sore spot for Tilray given that its cannabis production hasn’t been adequate to meet supply agreements or its own needs. Thus, the company has been purchasing wholesale cannabis to make up the deficit, which, in turn, hurts margins.

Let’s not also forget that Tilray’s management team made the head-scratching move in March to focus future investments in Europe and the United States. This isn’t to say that these aren’t attractive markets, so much as it’s a strange move to make just months after Canada became the first industrialized country in the world to legalize recreational weed. It’s almost as if Tilray missed its opportunity to grab market share in Canada, and is now tucking its tail between its legs and looking elsewhere for opportunity.

Without any clear growth plan, earnings estimates have tumbled. What had once been a forecasted profit in 2020 has quickly turned into a $0.75 loss per share, according to Wall Street. Suffice it to say that an operating profit probably isn’t possible before 2022…

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