Why Curaleaf Stock Wilted Today

What happened

Monday felt like a great day to own marijuana stocks. By and large, those equities soared on word of a potentially game-changing proposal in Congress for marijuana legalization, and a big acquisition by Curaleaf Holdings (OTC:CURLF).

Just 24 hours later, the story is different.

In Tuesday trading, Curaleaf led the cannabis sector downward as it fell 7.5% in early trading. Following Curaleaf down were pot peers Hexo (NASDAQ:HEXO) and Tilray (NASDAQ:TLRY), which also fell 7% or more.

The good news is that those last two, at least, didn’t stay down. By close of trading, Hexo stock was back up 1.9% again, while Tilray eked out a 0.1% gain. Curaleaf, however, never quite recovered, closing the day down 4.3%.

Image source: Getty Images.

So what

So who was to blame for all this distress? In a word: Curaleaf. On Monday night, the Massachusetts-based cannabis cultivator delivered its third quarter results, which revealed that as its sales boomed in the period, its losses swelled as well.

Revenue surged by 74% year over year to $317 million. However, Curaleaf also reported an $0.08-per-share loss — eight times worse than Q3 2020’s $0.01 per share loss.

Perhaps more worrisome is the fact that year to date, Curaleaf has recorded 149% sales growth, which means that the 74% growth rate recorded in Q3, while objectively impressive, actually represents a significant slowdown in the pace of growth. The company is also now up to $0.12 in losses per share over the year’s first three quarters — and Q3’s losses make up two-thirds of that total.  

Now what

Executive Chairman Boris Jordan attributed Q3’s troubles to “transient headwinds,” though, and insisted the Curaleaf “continued to execute well against our strategic initiatives, prioritizing growth and gaining market share.” However, he also warned that Curaleaf is now likely to hit only the lower end of the company’s announced 2021 revenue guidance range of $1.2 billion to $1.3 billion — and he made no promise of profits besides.

Indeed, I almost think investors should just give up any hope of seeing profits out of any of these companies this year. Consider: If Curaleaf’s sales are slowing, and it’s “prioritizing growth and … market share,” then chances are, it’s going to be competing on price to achieve that growth and grab that share.

This sounds to me like a recipe for a price war, and a price war in an industry where no one is turning a profit seems likely to torpedo margins for players across the board. Indeed, earlier today, Curaleaf peer Hexo announced that it’s closing three production sites “to centralize product cultivation, manufacturing, and distribution at its core facilities,” and presumably to cut costs as it weathers the coming storm.  

Marijuana investors who booked profits on Monday’s stock price rally and cashed out today may be making the right call.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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