Cannabis Industry Investors Are Likely to Earn Low Profits in The Third-Quarter

The market value of the cannabis industry has significantly dropped, and investors may not be expecting much from the quarter that just ended. The four leading Canadian marijuana companies by market value will be releasing reports for the quarter that ended September 30 this week. The expectations from those reports are very low. Stock prices in the sector have dropped 60% from the highs in March.

Investors know better not to focus on the “Timetables Towards Ebitda Profitability,” just like in all other recent quarters. According to Kenneth Shea, Bloomberg Intelligence analyst, investors cannot focus on ‘timetables towards Ebtida profitability’ till 2020 or 2021.

Tamy Chen, Bank of Montreal analyst, expects the sales to provincial wholesalers in Canada to drop by 20% each quarter due to the slow rollout of retail stores. The wholesalers are sitting on so many inventories from producers. This presents the risk of provincial wholesalers returning some merchandise to companies, which might also be facing the same challenge of inventory write-downs.

According to Vivien Azer, the industry is facing a lot of negatives. In her coverage universe last month, Azer cut her price targets on all Canadian cannabis companies. She was particularly hurt by the 19% month over month growth in August retail sales that were reported by Statics Canada.

“We are looking for indications for the abating of the multiple headwinds facing the industry,” said Azer.

Some products are still selling despite inventory gluts in some categories. This can be the only explanation why many consumers are still sourcing their products from the illicit market.

U.S marijuana companies are also facing the risks of Ebitda losses and huge cash burn. Due to some bottlenecks, the rollout for Canadian adult-use products has also been inhibited. U.S marijuana companies experienced a backdrop with sequential retail sales growth (quarterly) throughout the entire year.

According to Matt Bottomley, Canaccord Genuity analyst, things might not get easier for the industry even in 2020 despite the introduction of the new product formats and the growing store count. The industry is expected to witness significant growth in 2020. However, the industry is very competitive, which means that the growth will be unevenly distributed.