Expect 'survival of the fittest' story for pot in 2020

Falling stock prices, cash crunches, and tougher credit conditions create crucible for once-hot sector

Expect 'survival of the fittest' story for pot in 2020

A quick look at the stock-price histories of big-name pot companies will probably make for sobering reading among the sector’s earliest investors.

Share prices for Canopy Growth, which recently had to postpone a much-hyped launch of cannabis drinks, are hovering around $3, roughly half of where they were last year. The math is worse for Aurora Cannabis, whose shares are priced at roughly $2.75, compared to approximately $8 a year ago. U.S.-listed Tilray, which at one point in 2018 reached US$300 per share, is now in the vicinity of US$21.

“There's a lot of trepidation, understandably, and I think it's going to be some time before the capital markets come back,” Rishi Malkani, a cannabis industry expert and partner at Deloitte Canada, told CBC News.

It’s a classic case of expectation versus reality. A 2018 report by Deloitte said the sector could bring in revenue of $7.17 billion within 2019. Fast forward to today, and annual sales for the Canadian pot market is reported at around $1 billion, split among approximately 200 companies.

Oversupply, falling prices, and the slow rollout of physical stores has hurt most licensed cannabis producers in the past year, as noted by CBC News. It has spelled a cash drought that has forced many small and medium-sized players to seek an early exit by selling their companies to competitors. Others are attempting to cut off an arm to save the body, so to speak, by selling equipment and greenhouses — though finding a buyer could be challenging.

“[I]n most cases, those are assets you don't want to take on. They're not efficient,” Greg Engel, chief executive officer of Organigram, told the news outlet.

Organigram has been cited as a rarity in the pot sector, notching a four-quarter profit streak before suffering a loss in its final fiscal quarter last year; its fiscal first-quarter revenue this year beat the highest analyst estimate, leading to a 50% surge in its stock price last week.

“We are now seeing the separation between real operators and companies that based their value on hype,” Engel said.

As the hype on pot gives way to harsh realities, small- and mid-sized producers that are just now entering the game are struggling. While earlier entrants have had some luck getting credit from Canada’s largest financial institutions, nascent challengers are faced with a tighter application process even for basic credit facilities.

“It seems that most charted banks do not want to entertain new applications for lines of credits, loans, or new bank accounts,” Sam Rad, a marketing executive at CannaPiece Group, a late-stage cannabis licence applicant, told the Financial Post. 

As reported by the Post, Health Canada’s crackdown on medical pot producer CannTrust last year has apparently left major banks more wary about lending to pot firms; that’s led to additional requests for documents, requirements for more information, and a preference to accommodate applicants based on “strong cash flow.”

Aside from pot producers, cannabis retailers appear to be feeling the pinch — an inconvenient development as they aim to establish stores that are much-needed to open up the struggling pot space.

“The banks are pretty friendly towards mortgage-type lending particularly because there is an asset to back that particular credit,” Nadia Vattovaz, chief financial officer at cannabis retail chain Fire & Flower, told the Post. “But they are definitely less friendly towards lending for store build-outs and inventory.”


Follow WP on FacebookLinkedIn and Twitter