There's no argument on Wall Street or among investors that the legal marijuana industry is on track to be one of the fastest-growing industries over the next five to 10 years. Depending on your preferred source, the global cannabis industry could top $31 billion in sales by 2022, and push onward to between $50 billion and $75 billion in total annual sales by the end of the next decade.
On the bright side, these revenue dollars have to go somewhere, which means there will be winners in the cannabis space. On the other hand, it's led to the almost cultlike buying of marijuana stocks based on name only, rather than underlying fundamentals.
Would you invest in marijuana stocks if given a sort of blind assessment of a few companies in the industry? Let's find out.
Can you figure out which pot stocks are being discussed from these metrics?
Below I offer three examples of marijuana stocks, complete with a handful of facts about each company, minus the name, of course. Based on these metrics, do you know what pot stock this is, and would you really invest based on what you're reading?
Marijuana stock A:
- Cash represents 31% of its market cap
- Forward price-to-earnings ratio of 234
- Current price-to-sales ratio of 665
- Overseas presence in four countries
- Approximately $48,741 in market cap per kilogram of peak cannabis produced
Marijuana stock B:
- Cash represents 4% of its market cap
- Forward price-to-earnings ratio of 400
- Current price-to-sales ratio of 220
- 63% of total assets tied up in goodwill
- Approximately $13,114 in market cap per kilogram of peak cannabis produced
Marijuana stock C:
- Cash represents 9% of its market cap
- Forward price-to-earnings ratio is negative, because a loss is expected in 2020
- Current price-to-sales ratio of 127
- Current presence in 11 total countries
- Approximately $55,000 in market cap per kilogram of peak cannabis produced
Once again, in addition to seeing if you can identify these pot stocks, think about whether these metrics really sound enticing from an investment standpoint.
Got your answers? Let's take a closer look.
Marijuana stock A is...
The first stock is exceptionally cash-rich, relative to its market cap, but as you can see, its fundamental metrics beyond cash are pretty dreadful. If you guessed Cronos Group (NASDAQ: CRON), give yourself a pat on the back.
Cronos walked into a pretty sweet deal with Altria back in December, whereby the tobacco giant agreed to invest $1.8 billion in the company for a nondiluted 45% equity stake. Further, Altria walked away from with warrants that could be exercised at a later date to boost its equity in Cronos Group to 55%. This is why the company is now flush with more than $1.8 billion in cash.
But Cronos Group is going to need a lot more than simply cash to be relevant in the marijuana space. Its peak aggregate output of 120,000 kilos lags those of its large peers significantly, which is why it boasts such a high market cap-to-peak kilogram produced ratio. Investors would hope that Cronos looks to acquire added capacity with its cash in the quarters that lie ahead.
Furthermore, Cronos hasn't done a very good job of mitigating the very real possibility of oversupply and commoditization hitting the dried cannabis flower market in Canada within the next two years. With the exception of marginal production in Australia and Israel, and distribution deals with Poland and Germany, the company's overseas presence is hardly significant.
There's a reason I often refer to Cronos Group as the most overvalued marijuana stock, and these metrics demonstrate it perfectly.
Marijuana stock B is...
The second marijuana stock is substantially cheaper than the other two in terms of market cap per peak kilogram potential, but you'll note that a number of its balance sheet metrics, such as cash and goodwill, are worrisome. If you guessed Aurora Cannabis (NYSE: ACB), then you were correct.
Aurora Cannabis is set to lead all growers in peak annual production. Although the company has conservatively forecast in excess of 500,000 kilos at full operation, yours truly figures it'll be closer to 700,000 kilos a year. It's this large production lead that continues to attract investors to Aurora, even if other metrics are worrisome.
For instance, even though it had around 500 million Canadian dollars in its coffers when it released its second-quarter operating results in mid-February, this cash simply isn't enough to sustain Aurora and its acquisition-heavy strategy -- a strategy, mind you, that's led to its potentially overpaying for assets. Aurora Cannabis has frequently used its common stock as a means to finance dealmaking and its international expansion, which tends to dilute the value of existing shareholders and makes it that much harder for the company to generate a meaningful per-share profit.
You'll also note that the company's forward price-to-earnings ratio is on the rise. A combination of supply chain issues in Canada, coupled with high expenditures tied to the company's acquisitions and international expansion, might make it difficult for Aurora Cannabis to turn a recurring profit anytime before 2021.
Do investors really want to wait up to two years for a marijuana stock with a $9.2 billion market cap to get its bottom line in order?
Marijuana stock C is...
Last but not least, the third marijuana stock has an excellent overseas presence but, like the first company, is sort of a disaster fundamentally and from a production perspective. If you were thinking Tilray (NASDAQ: TLRY), then you were correct.
Tilray, which is best known for its medical cannabis brands in Canada, has done a pretty good job of establishing sales channels in overseas markets. Unlike Cronos Group, Tilray looks prepared if per-gram dried flower pricing falls in the coming years.
Unfortunately, Tilray's peak production might be even less impressive than Cronos', with around 100,000 kilos annually at the moment. What's perhaps the biggest surprise is that Tilray's CEO, Brendan Kennedy, announced that his company would be focusing on the U.S. market (via hemp) and the European Union, effectively de-emphasizing the Canadian market. Kennedy referred to Canadian assets as overvalued in his commentary with analysts, and I certainly don't fault him for his analysis. But the complete shift in strategy does make it appear as if Tilray was completely outmaneuvered by its larger peers in Canada.
Because Tilray is looking overseas to build its cannabis empire, expenditures are probably going to be higher than initially forecast even a few months ago. That's bad news for a company that's been losing money since the get-go and will likely continue losing money through 2020.
Would you really want to buy a marijuana stock that suddenly decided to shift its long-term strategy? I know I wouldn't.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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