Marijuana stocks lit up the stock market again on Monday, with shares of Tilray Brands (TLRY 9.60%), for example, gaining 9.4% through 1:25 p.m. ET. Gains at two of the three other best-known publicly traded marijuana stocks, however, did much, much better, with Canopy Growth (CGC 81.37%) rising 54% and Aurora Cannabis (ACB 72.17%) rocketing an astounding 74%.
What the heck is going on here, investors must be wondering?
That’s an excellent question. Let’s see if I can provide an answer.
In the case of Aurora Cannabis, let’s begin with a press release from the company late Friday afternoon after close of trading for the day. Aurora informed investors that it had bought back about $9 million worth of its convertible debt and issued 20.1 million new shares to raise the cash for the buybacks. Management explained the move as being intended to reduce its debt load, save about $660,000 in annual interest expense and…make it easier for the company to achieve its goal of reporting positive free cash flow (FCF) in calendar year 2024.
This announcement may have caught investors by surprise. After all, according to analysts polled by S&P Global Market Intelligence, Aurora Cannabis isn’t expected to achieve either profits according to generally accepted accounting principles (GAAP) or positive FCF before 2026 at the earliest. But here’s Aurora management saying not only that it will hit this goal two years ahead of time but taking affirmative action to help make that happen.
No wonder investors are shocked. No wonder they’re applauding!
I do wonder, though, if Aurora Cannabis is actually going to be able to hit this goal so much sooner than anyone on Wall Street thought possible — or indeed, hit it at all.
Other investors, however, may be taking the opposite approach. They may be thinking that it sure sounds like Wall Street was wrong about Aurora Cannabis. And if Wall Street was wrong about Aurora Cannabis, might it also be wrong about Canopy Growth (not expected to report positive profits before 2028)? Might Canopy, too, turn profitable earlier than expected?
And what about Tilray? As with Aurora, analysts polled by S&P were already thinking Tilray would report a GAAP profit in 2026. Unlike Aurora, these same analysts were already assuming that Tilray would begin generating some free cash flow in 2024. And if Aurora thinks it can generate cash profits next year, then might not this reinforce expectations that Tilray will, too?
Meanwhile, we’ve got positive tailwinds out of Washington, D.C. where legislators are moving to advance the Secure and Fair Enforcement (SAFE) Banking Act for a floor vote, even as the U.S. Department of Health and Human Services pushes the Drug Enforcent Administration (DEA) to reschedule marijuana as a less dangerous Schedule III controlled substance. Both these developments are continuing to lift cannabis stocks higher, as visions of marijuana legalization dance in investors’ heads. These same investors may even be interpreting Aurora’s promises of 2024 FCF as being more likely to be fulfilled if the regulatory environment for marijuana gets more benign.
And they may be right. That being said, cannabis investors have been burned by irrational exuberance before. Over the past couple of years, Tilray Brands shares have lost 74% of their value, Aurora Cannabis, 88%, and Canopy Growth, 91%. Before betting too much of your hard-earned cash on a belief that “this time will be different,” I’d suggest checking the numbers — and making sure Aurora Cannabis’ promises pan out.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.