Jefferies analyst Owen Bennett downgraded both Aurora Cannabis and Tilray to Underperform from Hold, and cut price targets. He thinks valuation is too stretched.
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A week after earnings reports from Canadian marijuana growers Aurora Cannabis and Tilray, an analyst at Jefferies downgraded both stocks at Underperform.
Jefferies analyst Owen Bennett lowered both Aurora (ticker: ACB) and Tilray (TLRY) to Underperform from Hold. He cut the price target on Aurora to $3.75 from $5.16, and lowered Tilray’s to $4.77 from $5.60.
Bennett noted both Aurora stock and Tilray rose in recent weeks following positive election news in the U.S., as a handful of states voting on expanding legal cannabis approved ballot measures on election day. But he doesn’t believe such gains had much do to these firms’ fundamentals, instead pointing to things like retail investors’ fear of missing out.
Aurora also announced plans for an overnight offering, sending shares notably lower on the news. Bennett still thinks the valuation is too stretched. He called the offering a shrewd move, noting the company needs cash due to its sizable near-term debt commitments and its ambitions to compete in the U.S. cannabis market, when it is legal to do so while listed on the New York Stock Exchange.
“Being well capitalised will be key to Canadian competitiveness against U.S. incumbents, and in fact given US cash needs, we would suggest even more sizeable dilution in the next 12-18 months is possible and likely,” Bennett wrote.
Bennett also pointed to the company’s shift from its cheaper pot brand, called Daily Special, to more premium pot. He thinks for the shift to work, investors need to see higher-margin products more than offset declines from value-priced pot. While it’s still very early in that process, he notes there hasn’t yet been evidence.
For Tilray, Bennett pointed to stalling momentum in international markets, an area he feels would be key to the stock’s bullish thesis. While he notes Tilray pointed to a number of unforeseen headwinds that led international sales to decline quarter-over-quarter, Bennett thinks there is cause for concern.
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“If we don’t see a material pick up soon, it could really weigh on sentiment,” he wrote.
Tilray has said it expects medical cannabis legalization efforts in Europe in the next year or so, with recreational cannabis to his certain European markets in 2021 and 2022.
Meanwhile in the U.S., despite gains for the stock around election day, Bennett sees no reason to think Tilray can be successful in the U.S. while competing with peers and existing U.S. growers, which list shares in Canada and over-the-counter because pot is still illegal at the federal level. Cannabidiol, or CBD, is legal in the states, and Bennett notes its offerings haven’t stood out much.
“While Tilray has a U.S. presence in Manitoba Harvest, sales have been flat all year so hardly inspiring, while the big ambitions it had in CBD have come to little,” he wrote. “Critically, on this evidence, there is also nothing to convince us it could be a strong competitor” if recreational marijuana becomes legal in the U.S.
Tilray stock is down 5.1% to $7.26 in Monday morning trading, while Aurora stock is down 3.2% to $6.85. The S&P 500 index was up 0.8% following upbeat vaccine data from Moderna (MRNA).
Write to Connor Smith at [email protected]
