2020 has been a rough year for just about every industry you can think of, and the Canadian economy has been hit hard and fast. The combination of falling demand, interrupted supply chains and flat-lining confidence has caused disruption in a number of markets and companies.
One unexpected place to find falling values is the cannabis sector. One might have thought that the cannabis and CBD sector, which straddles both ‘alternative’ health and wellness and stay-at-home recreation, would survive or even thrive in the COVID-19 economy. Yet the year has seen stock prices plummet for two Canadian front-runners: Aurora Cannabis fell 61% while competitor Canopy Growth took a 36% hit from its January high.
What is going wrong for these Canadian cannabis heavyweights?
These falls are part of a larger ongoing drop off in value for these companies, and far from a temporary trend. As you start to scramble looking for alternatives, it’s important to take a step back and look at why.
While the stories for the two companies are neither unique nor identical, there are certain key trends in both which highlight underlying weaknesses in the sector. Most of these can be connected to the initial hype surrounding the budding field, an inflated bubble which led to poor decisions or natural consequences which are now cutting into their ability to profit.
A craze will never last long enough to justify crazy behaviour
The initial boom in the cannabis industry following progressive legalization last decade is key to understanding the behaviour of the companies now suffering it’s loss. Like a gust of wind that pushes ships forward fast, the rush of capital and interest into companies like Aurora and Canopy helps explain their meteoric rise onto market radars.
From 2017 to 2019, stocks virtually doubled for each company every year, rising from insignificance in 2016 to major players as the industry took off. Such winds however can easily steer a ship off course, especially if the captains are looking for speed rather than safety. Both companies, but Aurora Cannabis in particular, spent a little too heavily on investments that have failed to pay off at their inflated prices.
A decent chunk of their stock fallback can be attributed to the consequences of these decisions coming home to roost. Between trailing off interest and flagging investor enthusiasm the inevitable bust has arrived with consistent losses. It is no surprise that CEO changes have shook up both as they struggle towards profitability in 2020.
Competition dragging the Cannabis alternative health sector down
Unfortunately they were not alone in the field. Other companies (including pharmaceutical giants) started pushing into the sector. The increased competition has been an intense downward pressure on the value and performance of the Canadian companies.
This is felt especially strongly in the ‘medical’ field of cannabis products. Despite the online popularity of contemplating CDB as a treatment for COVID-19 (and the occasional promising study) Canopy growth’s trend is decidedly downward. The company which prides itself on being number one for medical cannabis has not suffered so hard a fall as Aurora, but faces even stiffer competition. Their challengers are both large scale companies with significant weight to throw around, and small ‘green’ start-ups that seem to be popping up across North America.
Clearly those who benefited the most are the investors who got in early on the companies’ explosive growth by seeing the trend coming.
What will the next boom be?
As always in the ‘alternative’ health and wellness sector it is difficult to predict with any certainty. But judging by the rapidly increasing celebrity buzz and fitness trends in the US, Adaptogenic plants – especially mushroom – based products are on the way upwards.
Like CBD before it, they have a ‘fresh’ feel from their connection to deep international traditions (rather than the drug field). They also offer great flexibility and are bolstered by increasing medical research attention which are both needed to fuel the feedback loop of positive press required for a real boom.
While their fate is not a certainty, there are certainly Cannadians building on their future. Rritual has already started to gain international attention for its savvy marketing of adaptogen products, and if the field takes off, they may be poised to become the next Aurora or Canopy. Hopefully they will remember the lessons of those who have come before.
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(Featured image by Yash Lucid via Pexels)
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