Cannabis stock valuations have gone up in smoke.
Marijuana is expected to be one of the fastest-growing industries on the planet over the next decade. But that hasn’t stopped the still-nascent industry from encountering a slew of growing pains.
To our north, Canada has contended with a bevy of regulatory-induced supply issues. Some provinces have dealt with shortages, whereas other regions have seen bottlenecks. In Ontario, for instance, a mere 24 dispensaries were open for business as of the one-year anniversary of the commencement of adult-use sales. This has allowed black-market producers to thrive.
Meanwhile, cannabis companies in the U.S. have struggled to access nondilutive forms of financing and have been unable to compete with illicit growers on price in core markets that are overtaxing legal cannabis.
The end result is that pot stock valuations have plummeted across the board. In fact, whereas there were once 20 cannabis separate cannabis stock that boasted a market cap of at least $1 billion, there are now only eight remaining, some of which are barely hanging on.
Many popular cannabis stocks — Aphria, OrganiGram Holdings, MedMen Enterprises, Acreage Holdings, Charlotte’s Web, Cresco Labs, CannTrust, HEXO, Harvest Health & Recreation, Sundial Growers, and Green Organic Dutchman — were all once giants, but are now notably below the $1 billion market cap threshold. Trulieve Cannabis also misses the cut by a few million dollars.
What you see below are the eight last remaining members of marijuana’s billion-dollar club.
Canopy Growth: $5.34 billion
Canopy Growth is still, far and away, the largest marijuana stock, but its fall from grace has been notable. Once a nearly $17 billion company, Canopy Growth is within a stone’s throw of touching levels not seen since 2017.
While the company does still have an enviable $2.27 billion Canadian in cash, cash equivalents, and marketable securities, there’s no sweeping under the rug that this cash pile has been more than halved over the past year as operating losses (and share-based compensation) have piled up. Canopy Growth recently announced an aggressive plan to shutter around 3.3 million square feet of licensed production space and lay off 500 workers, but it remains to be seen if that’ll stop the bleeding.
GW Pharmaceuticals: $3 billion
Even though management dislikes when their company is lumped in with “cannabis stocks,” cannabinoid-based drug developer GW Pharmaceuticals has certainly held up pretty well. In November 2018, GW Pharmaceuticals launched Epidiolex, a CBD-based oral therapy, to treat two rare types of childhood-onset epilepsy. Early uptake and insurer coverage of the drug has been impressive. But the real test for the company will come from Zogenix, which may have a competing therapy on pharmacy shelves sooner than later.
Curaleaf Holdings: $2.25 billion
Among U.S. multistate operators (MSOs), Curaleaf Holdings is king with a $2.25 billion market cap. Following its announcement last week that it would acquire edibles manufacturer BlueKudu in Colorado, Curaleaf will have a presence in 20 states on a pro forma basis, which ties Acreage Holdings for the broadest U.S. presence.
In addition, once the purchase of privately held MSO Grassroots closes, Curaleaf will hold approximately 130 retail licenses and be operating close to 75 dispensaries. Both would likely be top marks among U.S. MSOs. Currently on track to be the first pot stock to reach $1 billion in annual sales, there’s good reason for Curaleaf to be the most valuable MSO.
Cronos Group: $2.03 billion
With regard to Cronos Group’s $2 billion market cap, I only have two words: cash talks. Having closed a $1.8 billion equity investment from tobacco giant Altria Group in March 2019, Cronos still had in the neighborhood of $1.48 billion in cash, cash equivalents, and marketable securities in its coffers as of the end of September. This huge cash balance has helped somewhat buoy Cronos’ valuation and mask the fact that its cultivation and derivative production has largely been a disappointment in the early going. Cronos Group is going to need vape-health concerns and supply issues from China to subside if it’s going to rebound anytime soon.
Innovative Industrial Properties: $1.6 billion
Marijuana real estate investment trust (REIT) Innovative Industrial Properties is easily the most impressive pot stock at the moment. Focused on acquiring medical cannabis growing and processing sites, then leasing them out for extended periods of time, Innovative Industrial Properties’ business model yields highly predictable cash flow with minimal ongoing expenses.
Currently, IIP owns 51 properties with a weighted-average lease length of 15.6 years and an average yield on its $680.7 million invested/pledged capital of 13.3%. This means it’ll net a complete payback on its invested capital in just over five years, all while returning more than 4% to shareholders annually via a budding dividend.
Aurora Cannabis: $1.37 billion
Investing isn’t a popularity contest, as millennial investors have found out with Aurora Cannabis. Once a nearly $9 billion company, the most-held stock on investing app Robinhood has been tumbling precipitously for a year. Facing a potential cash crunch and weaker-than-expected demand domestically and abroad, Aurora Cannabis has halted construction on two of its largest grow farms, and recently put a 1-million-square-foot greenhouse up for sale. I estimate this will cut Aurora’s peak production potential by up to two-thirds. Aurora Cannabis also shed 500 jobs and restructured its debt covenants, which is a sign that this company is far from financially sound.
Green Thumb Industries: $1.35 billion
Although it trails Curaleaf pretty significantly in market cap, Green Thumb Industries is another impressive MSO that should soon be thriving in the United States. Acquisitions have allowed Green Thumb to have a significant presence in Illinois and Nevada, which are both expected to be markets that generate $1 billion-plus in annual weed sales by 2024. Green Thumb’s 96 retail licenses rank among the top five for MSOs, and its presence in 12 states is primarily focused on core (i.e., billion-dollar potential) markets.
Tilray $1.04 billion
Last, but not least, there’s the struggling Tilray, which is barely clinging onto its billion-dollar status after a very weak fourth-quarter report. For the quarter, total cannabis revenue shrank 20% from the sequential third quarter, while cash, cash equivalents, and short-term investments were down to $96.8 million from $517.6 million in the year-ago quarter. Tilray’s management made the surprising move to de-emphasize Canada in favor of Europe and the U.S. last March, but it’s meant an uptick in costs to get all the required infrastructure in place as it makes this long-term strategic shift. I wouldn’t be surprised to see Tilray fall off this list very soon.