Why Investors Should be Cautious with Cannabis Stocks: The Case of Curaleaf

Cannabis companies used to be primarily concerned with expansion at any cost but that is no longer the case. Investors are getting sick of companies that aren’t profitable, putting pressure on them to be more fiscally responsible.

Marijuana entrepreneurs are typically eager to enter new markets that have recently legalized cannabis usage, but this tendency may be changing.

There have been recent occurrences with marijuana businesses cutting costs and laying off employees, but what truly piqued my interest was when a leading cannabis company revealed a bombshell: it would be leaving not one, but three states.

Curaleaf Plans to Close Most of its Businesses in California, Colorado, and Oregon.

Curaleaf Holdings (CURLF) said on January 26 that it will be closing most of its activities (producing and cultivation) in three major markets: California, Colorado, and Oregon. According to the corporation, the decision is “part of its ongoing attempt to streamline its business.” It also stated that its activities in Massachusetts would be consolidated.

It’s easy to see why Curaleaf could be motivated to cut costs, given that the company hasn’t been growing much lately and its bottom line is still in the red.

The company cited “price compression and a lack of policing of the illicit market” as two of the primary reasons for its decision to close its manufacturing and cultivation plants in these states.

Why is This Significant?

Curaleaf has been a growth machine throughout the years, generating $1.3 billion in revenue in the previous 12 months. It’s a market leader, so investors shouldn’t ignore the news if it’s pulling out of some of the most important markets. When it posted its third-quarter profits in November, the company said that it had 142 dispensaries across 22 states, making it one of the industry’s largest footprints.

The most shocking aspect of the news was Curaleaf’s claim that the markets it was exiting would generate less than $50 million in sales for the firm in 2022. Given that California and Colorado have the largest marijuana markets in the country, that’s a very low amount. It emphasizes the rivalry and obstacles that companies confront in those areas, and it serves as a reminder that just because a marijuana specialist enters a new market, does not guarantee a good impact on both sales and earnings.

Curaleaf claims the changes will help it achieve at least $125 million in positive free cash flow this year. That’s a lofty aim given that the company rarely generates positive operating cash flow, let alone free cash flow, which includes operating cash and subtracts capital expenditures.

Should Investors Avoid Cannabis Stocks?

Although growth investors see substantial long-term potential in the cannabis market, many are betting on the probability of federal marijuana legalization in the United States occurring soon, which can be a risky assumption to make. And, given the industry’s continued uncertainty, many people may believe it is still too early to invest in cannabis.

Cannabis companies, like Curaleaf, are only now beginning to prioritize cash flow and long-term operations. That will make them more tenable investments and better bargains in the long run. But, for the time being, cannabis stocks are in for a rough ride. Unless you have a high-risk tolerance, you should avoid marijuana stocks because this is still a risky business to invest in.

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