Why Aurora Cannabis, Canopy Growth, and Tilray Sank Today — The Motley Fool

What happened

Big Canadian marijuana stocks had a rough day on Wednesday. Shares of Aurora Cannabis (NYSE:ACB) were down 8.5% as of 3:32 p.m. EST, with Canopy Growth Corp. (NYSE:CGC) sinking 12% and Tilray (NASDAQ:TLRY) dropping 8.3%.

Canopy Growth announced disappointing fiscal 2019 second-quarter results before the market opened on Wednesday. The company’s Q2 revenue was lower than expected. Canopy also posted its biggest loss in the company’s history.

This letdown, combined with a broader market pullback, weighed on Aurora Cannabis and Tilray as well. Both companies reported their latest quarterly results earlier this week.

Image source: Getty Images.

So what

Tilray CEO Brendan Kennedy hit the nail on the head with his comments on the company’s Q3 update on Tuesday: “We are in the early stages of achieving our growth potential,” Kennedy said. His remarks about Tilray also apply for Aurora Cannabis and Canopy Growth.

Canopy’s revenue miss and big net loss in the latest quarter really don’t matter. The revenue primarily included sales of medical marijuana in Canada. This market will quickly become much less important to the company as the Canadian recreational-marijuana market grows, and as more international medical-marijuana opportunities open up.

Both Canopy Growth and Tilray reported losses. However, in both cases, the losses were largely due to increased spending related to ramping up for the Canadian recreational-marijuana market. Aurora Cannabis had a profit, but it came with an asterisk: The company changed how it accounts for its investments. Without this change, Aurora would have reported a loss, as its peers did.

In the big scheme of things, these three companies’ quarterly results — both positive and negative — aren’t important. Neither is today’s broader market pullback. What really matters for Aurora, Canopy, and Tilray is the growth of the global cannabis industry, and how effectively each company can capitalize on this growth.

Now what

There are several things for investors to watch in the coming months that will make a difference for Aurora, Canopy, and Tilray. One is how each company progresses in expanding production capacity. These efforts directly relate to another key thing to watch — resolution of supply-chain issues with Canada’s recreational-marijuana market.

Perhaps the most critical development to keep your eyes on, however, is the expansion of international medical-marijuana markets. Germany will award domestic medical-cannabis production licenses in early 2019. The United Kingdom’s medical-marijuana market is just getting started. Mexico will soon legalize the use of recreational marijuana, and could potentially also legalize recreational-marijuana sales.

Then there’s the biggie: What could happen in the U.S. The results of the recent U.S. elections could pave the way for changes to federal marijuana laws. It’s possible that the doors to the world’s largest marijuana market could be opened to Aurora Cannabis, Canopy Growth, and Tilray in the not-too-distant future.

If you think all of this makes today’s declines for Aurora, Canopy, and Tilray seem insignificant, you’re right.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.