Although the cannabis industry experienced a significant uptick during the pandemic, it now faces a myriad of legal, economic, and industry-wide obstacles, which cast doubt on its prospects. Therefore, we think cannabis stocks Aurora Cannabis Inc. (ACB) and IM Cannabis Corp. (IMCC) are not worth the smoke now.
To gain a deeper understanding, let us first assess the current state of affairs within the industry.
The cannabis industry was rife with lucrative prospects buoyed by government backing amid the pandemic. However, it has suffered a consistent contraction since late 2022, and this unfavorable trajectory is anticipated to persist this year.
The Canadian cannabis market confronted formidable challenges, ranging from stockpiled inventories to supply chain bottlenecks. The industry is further plagued by rising taxes and prohibitive interstate trade barriers, alongside enduringly high inflation and inflated costs for fertilizers and raw materials, all of which could impede growth in 2023.
Meanwhile, despite a majority of states legalizing marijuana for medical or personal use, some have resorted to over-taxation and excessive regulation, resulting in a surge in illegal sales. This is contributing to an upsurge in black market sales, which legalization advocates aimed to curtail while augmenting tax revenue streams.
The black market for cannabis undermines legal enterprises by driving down their demand for their products, thereby diminishing their sales, revenues, and stock prices. The regulatory crackdown on illicit sales exacerbates these consequences by imposing heightened costs and compliance burdens on legal firms, constraining their profitability.
Conversely, authorized cannabis sales dwindled, with California's legal cannabis sales reaching $5.3 billion in 2022, reflecting an 8.2% decline from $5.77 billion in 2021. This could be attributed to exorbitant state taxes and a scarcity of dispensaries. The cost of recreational flowers in Colorado also nosedived by 23% in the past year.
The waning investor appetite for cannabis stocks is also evident from the AdvisorShares Pure Cannabis ETF's (YOLO) 17.7% decline over the past three months.
Let us now take a closer look at the stocks.
Aurora Cannabis Inc. (ACB)
Headquartered in Edmonton, Canada, ACB produces, distributes, and retails cannabis and its by-products. The company further supplies medical cannabis wholesale in the European Union, Australia, Caribbeans, South America, and Israel while cultivating and vending dried cannabis, oils, capsules, and extracts.
ACB’s trailing-12-month gross profit margin and EBITDA margin of negative 13.08% and negative 86.77% compare to the industry averages of 55.83% and 3.17%, respectively. Likewise, the stock’s trailing-12-month asset turnover ratio of 0.12x is 65% lower than the 0.34x industry average.
For the fiscal 2023 second quarter that ended December 31, 2022, ACB’s gross loss came in at CAD 16.17 million ($11.85 million), compared to a gross profit of CAD 5.58 million ($4.09 million) in the prior year’s period. Its loss from operations widened 28.3% year-over-year to CAD 71.60 million ($52.47 million).
In addition, net loss attributable to ACB and loss per share stood at CAD 65.39 million ($47.93 million) and CAD 0.20, respectively.
For the fiscal year ending March 2023, analysts expect ACB to report a loss per share of $0.31. The company’s revenue for the current year is expected to decrease by 21.8% from the previous year to $129.62 million. Furthermore, the company missed its consensus EPS estimates in all four trailing quarters, which is disappointing.
The stock has plunged 41.5% over the past six months and 82.7% over the past year to close the last trading session at $0.71.
ACB’s POWR Ratings reflect its bleak outlook. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
ACB has an F grade for Momentum and Sentiment and a D for Value and Quality. It ranks #161 among 167 stocks within the D-rated Medical - Pharmaceuticals industry.
In addition to the POWR Ratings just highlighted, you can see ACB’s ratings for Stability and Growth here.
IM Cannabis Corp. (IMCC)
IMCC, based in Tel Aviv-Yafo, Israel, breeds, grows, and supplies medical cannabis products across Israel, Germany, and Canada. It provides cannabis flowers and strain-specific extracts under the IMC brand, while the WAGNERS and Highland Grow brands offer dried flowers, pre-rolls, and pressed hash offerings.
The stock’s trailing-12-month gross profit margin of 16.42% is 70.6% lower than the 55.83% industry average. IMCC’s trailing-12-month EBITDA margin of negative 42.08% compares with the industry average of 3.17%. Likewise, the stock’s trailing-12-month CAPEX/Sales of 3.97% is 14.5% lower than the 4.64% industry average.
For the fiscal third quarter that ended September 30, 2022, IMCC’s cost of revenues increased 89% year-over-year to CAD 11.35 million (8.32 million). Its net loss from continuing operations stood at CAD 4.54 million ($3.32 million), compared to an income of CAD 830 thousand ($608.31 thousand) in the prior year’s quarter.
Furthermore, the company’s net loss widened significantly year-over-year to CAD 128.18 million ($93.94 million), and loss per share widened 905.6% year-over-year to CAD 1.81.
IMCC is expected to report a loss per share of $0.15 for the fourth quarter that ended December 2022. The company’s revenue for the same quarter is expected to decrease 28.2% from the prior year’s quarter to $11.50 million. Also, the company missed its consensus revenue estimates in three of four trailing quarters.
Additionally, analysts expect IMCC to report a loss per share of $0.08 for the fiscal first quarter ending March 2023. Likewise, the company’s revenue for the ongoing quarter is expected to decline 31% year-over-year to $12.48 million. The stock has plummeted 25.4% over the past month and 81.3% over the past six months to close the last trading session at $0.73.
It is no surprise that the stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
The stock has an F grade for Momentum and Quality and a D for Value and Stability. It ranks #162 within the same industry.
Click here to see the other ratings of IMCC for Sentiment and Growth.
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ACB shares were trading at $0.68 per share on Tuesday afternoon, down $0.03 (-3.87%). Year-to-date, ACB has declined -26.30%, versus a 3.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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