Cannabis stocks have gained in the past couple of months following the federal government’s reclassification of the drug. Experts also anticipate that the lobby to lift the ban on the U.S. financial institutions financing cannabis stocks and the reclassification may see the industry market value double to $57 billion by 2028.
These three cannabis stocks, however, do not share the same growth trajectory the industry is expected to follow. A combination of internal accounting and business factors could cause these stocks to trail below the industry growth rate and potentially lose investors a lot of money.
If you hold any of these three stocks, you should reconsider your position. Let’s dig into three struggling cannabis stocks to get your money out of by 2025.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) is one of the leading cannabis stocks in Canada. The company’s growth numbers have yet to meet target expectations in the long run. Canopy has fallen by more than three quarters in the last year alone. Starting from an extremely small revenue base, Canopy initially saw its revenue soar, thanks to the legalization of cannabis in Canada.
However, accounting methodologies and other non-fundamental factors have driven far more excitement than warranted.
Canopy Growth has continued to burn more cash than the revenue it’s generating, intending to bring production up to scale. The company has since dialed it back as demand in the Canadian market normalizes.
The company seems to hold a dominant position in a rather stagnant market. Given the current levels of taxation on cannabis, most people are resorting to the black market. This denies the Canadian cannabis industry a huge chunk of revenue.
Based on eight Wall Street analysts offering 12-month price targets for Canopy Growth in the last three months, the average price target is C$9.15, with a high forecast of C$20.01 and a low forecast of C$2.73. The average price target represents a -6.46% change from the last price of C$9.78.
Canopy’s sales books aren’t looking good either. The sales estimate for the next quarter is C$71.95 million, with a range of C$67.00 million on the lower and C$75.70 million on the higher. Sales results in the previous quarter were C$72.79M.
The company has beaten its sales estimates 50% of the time in the previous 12 months. Meanwhile, the industry beat sales estimates by 53.9% in the same period. With this underperformance and no clear breakthrough strategy, investors are encouraged to hold on to the CGC stock. This is not a good idea, factoring in the volatility of the cannabis industry.
Sundial Growers (SNDL)
Sundial Growers (NASDAQ:SNDL) is one of the top cannabis stocks in the U.S. The company also produces and distributes inhalable products, including flowers, pre-rolls and vapes.
The company has struggled with profitability and market competition in the cannabis sector in the recent past as the industry players continue to grow and the market dwindles. However, with over $780 million in cash and marketable securities, Sundial still has a strong balance sheet.
Even with this capitation, the company continues to burn cash, reporting a free cash outflow of $6.4 million in Q1 despite the improvement year-over-year. If Sundial’s retail profits deteriorate or growth initiatives don’t pay off, the company may need to raise additional capital on less favorable terms.
Investors should also consider that Sundial has a history of dilutive capital raises, and its share structure has become extremely complex, with multiple reverse splits. The stock is trading well below $2 with a market capitalization under $500 million, adding risk and volatility.
Furthermore, revenue declined sequentially from Q4 2023 due to seasonality in the company’s Liquor and Cannabis Retail segments. Sundial’s retail businesses could face pressure if consumer spending weakens or competition intensifies. This then positions Sundial as one of those stocks to sell for risk-averse investors.
Tilray (TLRY)
Tilray (NASDAQ:TLRY) is a mid-level player in the U.S. cannabis industry. In addition to cannabis, the company has additional product lines, including distribution, beverage alcohol and wellness business lines.
In 2023, the company acquired several brands, such as Anheuser-Busch, and doubled its alcohol segment. The company has also actively generated important sales diversification within the growing U.S. cannabis market as the industry sees more legalization efforts.
Despite these strategic business moves, Tilray’s financial reporting has not been good recently. The company is losing money at a faster rate than it is generating. While it is yet to report its Q2 earnings at the end of July, Q1 reports in February pointed to an actual ESP of -0.12 against the estimate of -0.05.
The company’s shares rebounded slightly in recent weeks following the reclassification of cannabis as a less dangerous drug but still sits at $1.79. This is near its 52-week low and even further from past highs pre-2020 when it traded north of $140.
The growth projections aren’t promising either. Analysts anticipate Tilray’s growth will slow down in the next quarter to 60% compared to the current quarter of 86.7%. The growth rate is also expected to slow down in the next five years, with experts expecting the company to grow at just 37% amidst the projected industry boom.
Given these growth projections, added to the fact that the company is generating more losses than profits, any risk-averse investor would consider Tilray one of the cannabis stocks to get their money out of before 2025.
On the date of publication, Joel Lim did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
