“We are downgrading ACB, SNDL and TLRY to market perform, all from outperform, as we grow increasingly cautious on the outlook for cannabis in Canada,” they wrote in a report.
“Headwinds that have plagued the industry (pricing, stores, inventory) do not appear to be fading as anticipated, while 2.0 is likely not the elixir that the market was hoping for. Canopy Growth (CGC) - Get Report remains our only outperform rated stock among the Canadian LPs.”
Cannabis 2.0 refers to new-product form factors like edibles and prerolled cannabis cigarettes.
The analyst team, led by Vivien Azer, now estimates a total available market of C$3.5 billion (US$2.6 billion) for legal cannabis sales, down 32% from its prior forecast.
“While industry challenges around doors [a marijuana strain] and high quality flower supply are well understood, we now believe that the slower than expected rollout of cannabis 2.0 products will also prove as a headwind to revenues,” the analysts said.
Canadian retail pot sales rose 16% in August through December, compared with a 70% increase in dispensaries, they wrote.
In addition, “we have seen a significant influx of value-based brands in the market, which speaks to the difficulty converting illicit market users, creating a bifurcation toward either value- or premium-priced flower, with a glut of mid-priced inventory,” the analysts said.
Meanwhile, stores have a shortage of edibles, they wrote.
At last check, shares of Aurora Cannabis traded at $1.56, down 6.6%. Sundial Growers traded at $1.43, down 6.5%. And Tilray traded at $17.91, down 7.5%.