The pot stock bubble has burst
Many cannabis firms have lost two-thirds or more of their value.
Wall Street’s exuberance over legal weed has quickly withered into sober reality.
In a matter of months, white-hot cannabis companies have f lamed out in spectacular fashion. Many have lost two-thirds or more of their value.
Widespread legalization has been thwarted. Bank financing has dried up. Deeppocketed institutional investors remain on the sidelines and old-fashioned black-market dealers still provide stiff competition.
The pain deepened Thursday, when Canopy Growth Corp. of Ontario, Canada, announced revenue that fell short of the lowest Wall Street estimate and a loss that one analyst called “astounding.” That sent shares to their lowest price since December 2017 — and they dropped again Friday and Monday, though they regained some of that ground Tuesday. Canopy is still the largest pot company in the world, but at less than $7 billion Canadian, its market value is just a sliver of the $24 billion it reached in April.
One day after Canopy’s announcement, MedMen Enterprises Inc. of Culver City — one of the first U.S. cannabis companies to sell shares to the public — said it would dismiss 190 employees, including about 20% of its corporate workforce, as it struggles to preserve a dwindling cash pile. Its shares closed Tuesday at 66 cents, down more than 32% since Friday and more than 90% from the peak it reached last year.
“The last industry chapter was defined by growth at all costs,” MedMen Chief Executive Adam Bierman said in an interview. “Now we’re transitioning out of that chapter, and that transition is harsh and quick.”
It wasn’t that long ago that the cannabis industry was on fire. Big markets such as Canada and California had legalized recreational use, while populous states including New York and New Jersey were expected to follow suit. This had executives and analysts forecasting sales in the tens of billions of dollars within a few years, sending stocks to valuations that even some in the industry warned were too high.
But legalization hasn’t been the trigger to invest that many expected. Canada’s biggest provinces have allowed few retail stores to open, while companies have struggled to develop the right mix of products. In California, the legal market has had to contend with high taxes and a well-established illicit market. Legalization efforts in other states have stalled.
Despite the obstacles, many remain optimistic that bullish benchmarks will be reached, though later than expected. Cowen Inc. analyst Vivien Azer recently boosted her U.S. sales outlook to $85 billion by 2030 from a previous forecast of $80 billion, while Canopy has said it’s still on track to turn a profit in three to five years.
For the first time, with stocks at such low levels, “there’s incredible pockets of value in the space,” said Justin Ort, chief investment officer for the Measure 8 Full Spectrum Fund, which invests in cannabis. “But the Street’s not willing to see it right now.”
What would get share buyers’ attention, Ort said, is legislative easing in the U.S., including passage of a proposed bill that would pave the way for financial institutions to do business with cannabis companies and bring large institutional investors and U.S. capital markets into the fold.
But cannabis remains federally illegal in the U.S., meaning shares are largely held by retail investors, who are less likely than institutional investors to remain patient in a downturn.
“In almost every other industry, people can make relative-value judgments,” Jeff Solomon, CEO of Cowen, said at his firm’s cannabis conference in Boston this month. “In this industry they’re like, ‘Well, it’s not really a matter of price, it’s a matter of whether or not I should even get involved.’ ”
That’s raised fears that many companies will go bankrupt before financing becomes available. It’s already happening to Canada’s DionyMed Brands Inc., which filed for receivership last month.