Optimism about the potential for further legalization of marijuana in the U.S.—including at the federal level—have this year improved the prospects of pot companies significantly. But while most cannabis operators are well positioned to take advantage of the growing domestic and international marijuana market, some companies seem to have lost steam due to stiff industry competition.
As legalization efforts gain momentum, several new players from Canada and the United States are setting up new cannabis operations. This has dramatically increased the level of competition in the cannabis space.
Against this backdrop, Wall Street analysts are extremely bearish about the prospects of Aurora Cannabis Inc. (ACB) and Sundial Growers Inc. (SNDL). Both companies are struggling to stay afloat financially. And, considering that their fundamentals are weak and losses high, we believe it’s wise to avoid them now.
Aurora Cannabis Inc. (ACB)
Canada-based ACB is a producer and distributor of medical cannabis products worldwide. The company develops oral, topical, edible, and inhalable products, as well as grinders and vaporizer lockable containers. Its services include patient counseling, design and construction, and cannabis analytical product testing.
ACB’s revenue declined 25% to CAD55.16 million ($44.46 million) in its fiscal third quarter, ended March 31, 2021. The company also reported a CAD142.96 million ($115.32 million) operating loss , representing a 71.4% increase year-over-year. Also, ACB’s net loss came in at CAD164.65 million ($132.86 million) over this period, and its gross loss was CAD85.46 million ($68.85 million) for this quarter, compared to a CAD19.65 million ($15.83 million) gross profit in the first quarter of 2020.
Analysts expect ACB’s revenue to decline 1.4% year-over-year to $206.78 million in the fiscal period ending June 2021. The stock has declined 27.6% over the past year and 8.1% over the past month.
ACB’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which translates to Strong Sell in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock also has an F grade for Sentiment, and a D grade for Momentum and Quality. Within the F-rated Medical – Pharmaceuticals industry, it is ranked #225 of 225 stocks. To see more of ACB’s component grades, click here.
Of the 11 Wall Street analysts that rated the stock, seven rated it Sell. Closing yesterday’s trading session at $8.88, analysts’ average target of $6.74 represents a potential 24.1% decline.
Sundial Growers Inc. (SNDL)
SNDL produces, distributes, and sells medicinal and adult-use cannabis. Cannabis products from the company are used as medical medications as well as to enhance social, spiritual, and recreational experiences. Sundial Cannabis-branded dried flower cannabis products are available in various formats, including pre-rolls, oils, capsules, and sublingual.
In May, SNDL and Inner Spirits Holdings Ltd. entered an agreement under which SNDL will purchase all Inner Spirit’s issued and outstanding common shares for approximately $131 million. The merger could diversify SNDL’s portfolio and strengthen its business prospects, but it will lead to a reduction in SNDL’s cash balance post-merger.
SNDL’s net revenue decreased 29.4% year-over-year to CAD9.89 million ($7.98 million) in the first quarter, ended March 31, 2021, primarily due to lower sales volume. Its negative gross margin under the cannabis segment came in at CAD3.45 million ($2.78 million) during this period. The company’s net loss from continuing operations increased 205.7% year-over-year to CAD134.45 million ($108.45 million), while its loss per share amounted to CAD0.09 ($0.07 million) during this period.
The company has a poor earnings surprise history; it failed to beat consensus EPS estimates in each of the trailing four quarters. A $45.34 million consensus revenue estimate for the current year represents a 10.2% decline from the same period last year. The stock has declined 28.7% over the past month and 16.4% over the past three months.
SNDL’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.
The stock also has an F grade for Value, Momentum, and Quality. Click here to see the additional POWR Ratings for SNDL. (Growth, Stability, and Sentiment). SNDL is ranked #221 of 225 stocks in the Medical – Pharmaceuticals industry.
The only Wall Street analyst providing a rating for the stock has rated it hold. Currently trading at $0.92, the $0.70 analyst price target represents a potential 23.9% decline.
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ACB shares were trading at $8.68 per share on Friday morning, down $0.20 (-2.25%). Year-to-date, ACB has gained 4.45%, versus a 16.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...
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