Why Are Cannabis Stocks Getting Beaten Up?

Cannabis stocks and ETFs have taken an intense market beating and continual losses. Major cannabis exchange traded funds (ETFs) have suffered a value deterioration of more than 55% in 2022. Investing money in these stocks is dangerous as their value continuously drops, posing a high risk to investors.

Although the share prices of these marijuana stocks saw variable spikes during 2022 due to increasing recreational sales, the growth spurt couldn't prevent the plunge in cannabis stock prices.

Data Source: tradingview.com as of September 23, 2022

One of the leading companies in this wave is Aurora Cannabis Inc. (ACB), with a negative 16% weekly return as of September 23, 2022. 

Aurora Cannabis Inc. ACB 

Wall Street was surprised by ACB's actual and adjusted losses. For Q4 2022, ACB's net loss was nearly $480 million, mainly derived from the non-cash impairment charge. ACB's bottom line has deteriorated significantly with a negative 1,232% profit margin in Q4, 2022, compared to a negative 233% profit margin in Q4, 2021.

Source: tradingview.com as of September 23, 2022

The Canadian marijuana producer struggles to generate consistent growth as its business operations remain unprofitable. As of September 23, 2022, trading at $1.20, the stock has dropped 77.82% from 2021's close. The fundamental reason for ACB's underperformance is its negative net income and profit margins. Investors are losing confidence in bullish arguments such as ACB's efforts toward cost-savings initiatives to cut down on expenses to improve EBITDA profitability. Being a growth stock, ACB has to deliver growth in terms of revenues and profitability to rise from the bottom. 

Tilray Brands, Inc. TLRY 

TLRY has lost -61.31% of its value in 2022 from the close of 2021. Trading at $2.72, TLRY is an example of a business with solid fundamental adversities. TLRY's revenue levels are growing year-over-year, but more adversely, the net income and profitability levels are going down. With annual revenue of $628 million, TLRY generated $477 million in net income in the last earnings report in July 2022 for the trailing 12 months.

Source: tradingview.com as of September 23, 2022

TLRY is losing cash rapidly as its operating activities led to a $177 million outflow over the last year. It has required significant improvements in its business operations to be a tenable investment. TLRY has attached significant risk, as its $4 billion revenue target seems unattainable by 2024 without any rapid enhancement in its top line. There is a strong possibility that its management will withdraw the forecast entirely.

HEXO Corp. HEXO

HEXO has lost -75.64% of its value in 2022 from 2021’s close. HEXO is currently trading at 17 cents. With $35 million in revenue, it reported a net income of negative $113 million in Q3 2022, far below expectations.

Source: tradingview.com as of September 23, 2022

HEXO's bullish move in March and early April was derived from investors' emphasis on its U.S. legalization catalyst. HEXO is associated with high downside risk due to its approach to diluting shares through a financing deal that minimizes its upside potential, even if there is an improvement in its operating performance. In May 2022, the announced equity sales program was considered an "off the shelf" equity distribution agreement. 

HEXO stock can continue its downtrend until the fundamentals become favorable, such as positive operating cash flows to match the cash burn rate, operational efficiency, and profitability growth rates.

Cronos Group Inc. CRON

Marijuana producer CRON, currently trading at $2.86, signifies a 27.04% drop in its stock price from 2021's close. Its Q2 2022 reported earnings signified an improvement in revenue with a massive deterioration in profitability compared to Q2 2021. CRON reported -88% profit margins with a revenue of $23 million in Q2 2022, whereas the profit margin stood at 365% with a revenue of $15 million in Q2 2021.

Source: tradingview.com as of September 23, 2022

In terms of liquidity and profitability, CRON is posting deteriorating performance. CRON has negative operating cash flows quarter-over-quarter, similar to its peers. CRON needs to attain positive net profits and generate significant growth rapidly to be the investor's preference.

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Cannabis stocks will continue to follow the downward trend. Technical analysts expect the emergence of significant support levels, but that requires a solid improvement in the performance of these companies to build confidence in the investors. As the RSI indicates oversold levels in the stocks, "trend reversals" can be expected in the coming weeks.

Investing in the cannabis industry based on technical analysis forecasts might be throwing caution to the winds for investors. The fundamentals of the cannabis industry present a different picture altogether, with most companies struggling to achieve profitability. Thus, investing in cannabis stocks right now might not be a good idea, as investors should not overlook the devil in the details inside.

Written by Anuj Sharma and Parul Bhatia for ToroAlerts, LLC