Earlier this week, Jefferies sent a warning sign to the cannabis sector and downgraded two of the largest Canadian Licensed Producers (LPs) to sell.
Aurora Cannabis Inc. (ACB.TO) (ACB) and Tilray Inc. (TLRY) were the subject of the broker-dealers’ downgrades and it comes after the sector has recorded a strong move higher in a post-election market. The bank lowered its price target on Aurora Cannabis and Tilray to $4.93 (CAD) and $4.77 (USD) from $6.90 (CAD) and $5.60 (USD), respectively.
The US general election proved to be a catalyst for the cannabis industry as four states passed legislation to legalize recreational cannabis market. Also, the market seems to be excited about the growth prospects that are associated with the cannabis industry under a Biden administration and Canadian companies are moving quickly to acquire US assets so they can be leveraged to this opportunity.
Although we are favorable on the trend and uptick in financing and acquisitions activity, some companies are acquiring questionable assets for premium prices. Aurora Cannabis’ acquisition of Reliva is a great example of this. Reliva is a US CBD brand and this is a vertical that we consider to be saturated. Going forward, we are curious to see how Aurora Cannabis is able to execute and expect the recent completion of a $175 million private placement to help support the growth of the business.
Tilray has been highly focused on the international cannabis opportunity and has not provided much guidance on the opportunity in the US after its write-down on the Authentic Brands Group acquisition. In 2019, Tilray acquired the asset to capitalize on the US CBD market and later claimed that the lack of direction from the US Food and Drug Administration (FDA) on CBD had negatively impacted the business.
If Tilray received direction from the FDA, the companies were going to launch CBD products in major retail outlets. Based on the performance of other CBD brands in such outlets, the company should be thanking the FDA for stalling. We continue to prefer the international cannabis opportunity over the US CBD and the Canadian cannabis market due to the economics from a margin standpoint and the lighter level of saturation.
To put it lightly, these Canadian cannabis producers dropped the ball on a major growth opportunity. At their respective peaks, the companies were valued at more than $25 billion in aggregate. Currently, the combined value of the companies is less than $2 billon and believe that they are past their prime.