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That Large Spike in Cannabis Sales Due to the Coronavirus -- It's Already Tapered Off

There was a lot of hoarding happening in March, and it wasn't all toilet paper and cleaning supplies. During the first few weeks of the month, cannabis sales were soaring and spiked around the middle of the month as fears heightened that people would be confined to their homes in an effort to fight the coronavirus pandemic.

However, the big bump in sales may prove to be short-lived, and the outlook for the marijuana industry may not be so rosy after all.

After incredible sales growth, pot sales have fallen off -- significantly

In the California, Washington, and Colorado pot markets, same-day cannabis sales were strong for much of the first half of March, according to point-of-sale data from Headset, a cannabis data intelligence firm.

A person buys cannabis at a dispensary with a credit card

Image Source: Getty Images

In California, for instance, daily sales were up by more than 50% during the first few weeks of March and reached a peak of 159% mid-month. But during the last week of the month, those figures largely stayed below 25%. Washington showed a similar story, although its growth in March was slower, at less than 25% for modest days before spiking to 100%. But during the last week, its sales growth turned negative from the prior year. Colorado is much the same, although it had limited sales growth in early March, by the end of the month its year-over-year declines were north of 40%.

There are multiple theories about why the slowdown occurred. The first is that consumers' buying habits have changed and that after loading up on pot, consumers don't need to return to shops as often. That theory will prove out or not in April if a similar spike and drop-off in sales take place. Another possibility is that with many people losing their jobs, consumers have less money to spend on cannabis and are focused on paying for day-to-day essentials instead.

Why there's likely to be more of a decline in the months to come

Medical marijuana may be a necessary expense for those looking for pain relief, but that isn't the case when it comes to recreational marijuana, which is a much more discretionary expense. In 2019, medical marijuana sales in Colorado totaled $338 million. That was just one-quarter of the $1.4 billion in revenue that came from the recreational market.

Discretionary expenses could be a key area that consumers cut out of their budgets in the coming weeks and months, especially as unemployment numbers soar. In the past two weeks, nearly 10 million Americans filed for unemployment benefits. The week ending March 28 saw a new one-week record of 6.6 million filings. And the longer the coronavirus pandemic remains out of control, the higher the unemployment numbers may get. Recreational marijuana purchases are going to fall in priority when consumers are struggling to pay their rent or mortgage along with other critical bills.

Lack of sales growth could seal the fate of many pot stocks

Harvest Health & Recreation (OTC: HRVSF) has multiple locations in California, and the cannabis company could be in trouble if its sales growth comes to a grinding halt in 2020. According to its third-quarter results, which it released on Nov. 29, 2019, the company burned through $65 million in cash over the trailing nine months and spent $102 million on property, plant, and equipment. Harvest's burned through significant cash over a relatively short period. On Dec. 31, 2018, the company had $192 million in cash and cash equivalents, but by Sep. 30, 2019, that number fell to just $18 million.

In February, investment bank Ello Capital projected that Harvest Health had only nine months of liquidity left. With no sales growth, or worse, with declining revenue, Harvest Health could be in a dire situation if it's not generating additional revenue to help offset its high rate of cash burn. The stock is already in a difficult position, down 92% over the past year, which is far worse than the 76% decline the Horizons Marijuana Life Sciences ETF has been on during that time.

But whether a cannabis company has operations in California, Colorado, Washington, or anywhere else in the U.S., a crippled economy can threaten the viability of many pot stocks this year.

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David Jagielski 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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