Pot stocks are still in their early growth stages. And while sales are high, so too are expenses, which is not a good recipe for financial statements. Many companies are bleeding cash and are nowhere near profitability. Legal issues also present big obstacles for the industry in the U.S. while supply shortages are a problem in Canada. However, that hasn’t stopped the hype from carrying stocks to sky-high valuations and investors from getting into a frenzy about the growth prospects for the industry.
And so for companies in other industries that want to go down this path and invest in cannabis, it’s a risky venture. While there’s definitely the concern that being associated with cannabis could have a negative impact on a company, especially a blue-chip one like Coca-Cola (NYSE:KO) or Starbucks (NASDAQ:SBUX) that would likely prefer not to be controversial, there could be even bigger problems: financial performance.
Altria disappoints in Q1 in part due to cannabis investment
In its most recent quarterly earnings, Altria, which announced that it had invested in Cronos Group Inc (TSX:CRON)(NYSE:CRON) last year, said that the cannabis investment is already weighing down its results. In just a three-month period, Altria recorded a charge of $159 million before taxes, which was in relation to its holdings in Cronos as well as Juul, an electronic cigarette company. Although Cronos hasn’t posted such significant losses, its share price has fallen by 6% over the past three months. Altria’s stock was also downgraded due to the aforementioned investments as well.
Altria’s share price has struggled since we learned that it would be acquiring Cronos back in December. And while it’s an investment that makes sense in the long term as tobacco sales are likely to taper off, in the short term it’s a bit of a harder sell. Altria, however, can afford to make the gamble given that it’s not likely to upset its customers in getting involved in the cannabis industry.
Worst still to come?
And things may not be getting better anytime soon, especially when it comes to Cronos. In The Company’s most recent earnings, it reported a net loss of $19 million. And while it has posted a profit in two of its last four quarters, its operating income has consistently been in the red. Cronos has also burned through more than $130 million over the past 12 months as a result of its operating and investing activities.
Bottom line
The challenge for companies in other industries is that they might not have as an accepting a customer base as Altria when it comes to marijuana nor the patience to wait for cannabis companies to start contributing to their bottom lines. These are key reasons why deals have been few and far between despite cannabis rising in popularity and many States making progress on legalization.
It’s been a slow process thus far getting other industries to jump into marijuana but as sales continue to grow we’ll likely see more of a push from investors to get into the emerging industry. Especially as cannabis companies start to break apart from the pack, it’ll be easier for investors to avoid the duds and minimize their overall risk.
