These Guys Are Spending a Lot of Money

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Cannabis stocks, all the rage in September, just issued their results. And they’re spending a ton of money.

Just look at Tilray (TLRY), which rose more than a 1,000 percent after going public in the heart of the marijuana frenzy. Its revenue from growing pot rose 85 percent. But production costs shot up 186 percent over the same time period.

Sales and marketing expenses more than doubled. Ditto for its general administrative outlays. Its overall net loss grew about tenfold.

“We are in the early stages of achieving our growth potential and our team continues to strategically execute on disciplined operational initiatives and investment,” CEO Brendan Kennedy said in a statement.

Not to be outdone, Canopy Growth (CGC) tripled its back-office expenses while growing revenue 63 percent. “These expenditures represent the Company’s view that strong brand recognition is, over time, essential to the Company’s successful market share acquisition strategy,” the company stated in its press release.

At least one big trader, Andrew Left at Citron Research, told CNBC yesterday he’s betting against the group because they’re all based in Canada and will struggle to enter the larger U.S. market.

Cannabis was legalized for recreational use north of the border on October 17, but the high started fading almost a month before the official date. TLRY and Cronos (CRON) hit their peaks on September 19, while CGC drifted right up to the deadline.

As cited on Market Insights at the time, most of these companies trade at vast premiums to underlying fundamentals. Their price-to-sales ratios, for instance, rank above many biotech stocks. Their earnings are negative, and operating leverage is going the wrong way. (Operating leverage means profitability should increase along with revenue, not decrease as you can see above.)

In conclusion, cannabis companies are spending like mad to create brand identities in a new and unknown market. But it’s not clear size and scale work in this business. Just look at Amsterdam’s hundreds of independent coffee shops, which suggest size and scale may not work for pot firms. Can the likes of TLRY, CGC and CRON become truly widespread brands like McDonald’s or Marlboro, or are they just shelling out the money now because they have it?

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.