Cannabis Flameout Rivals Dot-Com Bust as Legal Fears Curb Growth

2019-11-16 13:00:23.0 GMT

By Kristine Owram
(Bloomberg) -- Wall Street’s exuberance over legal weed has
quickly curdled into sober reality.
In a matter of months, white-hot cannabis companies have
flamed out in spectacular fashion. Many have lost two-thirds or
more of their value.
Widespread legalization has been thwarted. Bank financing
has dried up. Deep-pocketed institutional investors remain on
the sidelines and old-fashioned black-market dealers still
provide stiff competition.
The pain deepened on Thursday, when Ontario-based Canopy
Growth Corp. announced revenue that fell short of the lowest
Wall Street estimate and a loss that one analyst called
“astounding.” That sent shares to the lowest since December
2017. It’s still the largest pot company in the world, but at
C$7.1 billion its market value is just a sliver of the C$24
billion it reached in April.
One day later, MedMen Enterprises Inc., one of the first
U.S. cannabis companies to sell shares to the public, said it
would dismiss 190 employees, including about 20% of its
corporate workforce, as it struggles to preserve a dwindling
cash pile.
“The last industry chapter was defined by growth at all
costs,” MedMen Chief Executive Officer Adam Bierman said in an
interview. “Now we’re transitioning out of that chapter, and
that transition is harsh and quick.”

Legal Weed

It wasn’t that long ago that the cannabis industry was
cruising. Big markets like Canada and California had legalized
recreational use, while populous states such as New York and New
Jersey were expected to follow suit. This had executives and
analysts forecasting sales in the tens of billions of dollars
within a few years, sending stocks to valuations that even some
in the industry warned were too high.
But legalization hasn’t been the trigger to invest that
many expected. Canada’s biggest provinces have allowed few
retail stores to open, while companies have struggled to develop
the right mix of products. In California, the legal market has
had to contend with high taxes and a well-established illicit
market. Legalization efforts in other states have stalled.
Despite the obstacles, many remain optimistic that bullish
benchmarks will be reached, though later than expected. Cowen
Inc. analyst Vivien Azer recently boosted her U.S. sales outlook
to $85 billion by 2030 from a previous forecast of $80 billion,
while Canopy has said it’s still on track to turn a profit in
three to five years.
For the first time, with stocks at such low levels,
“there’s incredible pockets of value in the space,” said Justin
Ort, chief investment officer for the Measure 8 Full Spectrum
Fund, which invests in cannabis. “But the Street’s not willing
to see it right now.”
What would get share buyers’ attention, Ort said, is
legislative easing in the U.S., including passage of the SAFE
Banking Act, which would pave the way for financial institutions
to do business with cannabis companies and bring large
institutional investors and U.S. capital markets into the fold.

Patient Investors

But cannabis remains federally illegal in the U.S., meaning
that shares are largely held by retail investors, who are less
likely than institutional investors to remain patient in a
downturn.
“In almost every other industry, people can make relative-
value judgments,” Jeff Solomon, CEO of Cowen, said at his firm’s
cannabis conference in Boston last week. “In this industry
they’re like, ‘Well, it’s not really a matter of price, it’s a
matter of whether or not I should even get involved.’”
That’s raised fears that many companies will go bankrupt
before financing becomes available. It’s already happening to
DionyMed Brands Inc., which filed for receivership last month.
“The capital markets have gone from frothy to completely
closed,” MedMen’s Bierman said. “We’re now entering a stage
where businesses are going to have to be self-sustaining.”

To contact the reporter on this story:
Kristine Owram in New York at kowram@bloomberg.net
To contact the editors responsible for this story:
Brad Olesen at bolesen3@bloomberg.net
Bob Ivry, Stephen Merelman