Pot sector financials range from underwhelming to “downright startling”, says Raymond James

The pot sector financials released this week range from underwhelming to “downright startling”, says one analyst.

In a sector coverage note delivered on Friday, Raymond James analyst Rahul Sarugaser argues that it will likely be another year or more before distribution channels in Canada’s cannabis sector widen enough to accommodate the glut of cannabis currently coming to market, effectively putting asset-heavy Canadian licensed producers in peril.

Describing the Canadian marijuana market as currently a crowded and closed system, Sarugaser says that the slow rollout of pot shops across the country has put a big hurt on big names like Canopy Growth and Aurora Cannabis and that companies need to look beyond Canada’s borders for revenue streams to shore up their business.

It’s been a dark week for the Canadian cannabis, with a number of the industry’s biggest players releasing quarterly financials that speak of a market ill-equipped to handle the sheer number of players competing for a piece of the still-evolving recreational marijuana space.

Canopy Growth, Aurora, Tilray and Cronos Group all reported over the last few days, with a fifth major company, Aphria having delivered in October.

Pot sector financials disappoint…

With the exception of Aphria, which surprised with its second profitable quarter in a row, all of Canada’s top companies posted poor numbers, with losses mounting and expansion plans put in jeopardy by an abrupt halt in growth of a Canadian market that was until recently thought to be only just beginning.

Considered by many as the industry leader, Canopy Growth on Thursday reported an EBITDA loss of $155.7 million for its fiscal second quarter, more than double that of a year ago, along with another set of restructuring charges that have analysts lowering their expectations for the foreseeable future.

Most worrying, revenues have fallen for the most quarter —including for Aphria— a sign of trouble, says Sarugaser, who describes the recent round of financials as “ranging from underwhelming to downright startling.”

“One durable theme we’ve witnessed during the last two quarters has been flat or declining revenues—particularly among the big five: ACB, APHA, CRON, TLRY, and WEED —with yesterday providing a perfect case study, as WEED and ACB each missed consensus revenue estimates by a mile,” writes Sarugaser.

“In a growth industry, this is a real problem,” he said.

Sarugaser points to an unanticipated sales bottleneck across the country as the culprit, with Ontario being singled out for its poor performance in getting pot shops open for ready and willing customers. The result has been inventories of dried cannabis and other products piling up, product returns and plummeting cannabis prices for B2B sellers.

Industry watchers have for some time now warned that even if demand reaches the more optimistic of expectations, the sector won’t be able to support the dozens of companies that have popped up over the last few years and that a major consolidation will occur.

Sarugaser seems on a similar wavelength, saying that while the current bloodletting is severe, some of it is not unwarranted, even for the industry’s largest players.

“Asset-heavy LPs that rely mainly on Canadian market dynamics to support multi-billion dollar valuations, we believe, are in trouble,” Sarugaser writes.

“Until retail distribution is right-sized throughout Canada, and until Cannabis 2.0 sales come online and ratchet up in a material way, we anticipate continued pain for the big five LPs,” he said.