In the last 90 days, Wall Street analysts have significantly lowered their projections of earnings-per-share for several major publicly-traded cannabis stocks, The Motley Fool reports.
Earnings estimates for three of Canada‘s top producers for the 2020 fiscal year have plunged up to 71 percent in Canadian dollars.
Canopy Growth’s earnings per share in the 2020 fiscal year as of 90 days ago, for instance, were projected to be CA$0.28. As of the updated forecast, they’re now CA$0.08, a 71% reduction. Aurora Cannabis saw their projected forecast go from CA$0.16 to $0.12. Tilray’s earnings-per-share are projected to fall from a loss of 32 cents Canadian per share to an expected loss of 41 cents Canadian per share.
Analysts suspect a number of factors are at play with these broad reductions in earnings forecasts.
First, there is no reliable precedent for the development of this industry. The cannabis industry exists somewhere between agriculture and pharmaceuticals; it makes analysts uncomfortable with predicting outcomes as the industry develops.
Additionally, startup costs are huge. These companies are posting big losses quarter-to-quarter due to that — they’re spending their money, not yet making it.
Regulation is also uncertain. Many policies are not completely developed or rolled out, which means that it’s unpredictable exactly how the industry will develop.
And these companies are also diluting their shares: many acquisition and merger deals are paid for in stock, which means that there are more shares created all the time. Aurora, for instance, had a share count of about 16 million at the end of 2014; as of 2019, Aurora has issued at least 962 million shares.
While the earnings projections for these companies may not fully indicate the overall health of the developing cannabis industry, what’s clear is that there is more than enough uncertainty to go around — especially when it comes to investing in a publicly-traded cannabis company.