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Should You Buy Canopy Growth Stock After Its Ugly Q2 Results?

By Keith Speights - Nov 21, 2019 at 7:05AM

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The road ahead might be a rocky one. But the future should be brighter than the present for this top Canadian cannabis producer.

Canopy Growth ( CGC -3.57% ) went from becoming one of the most popular Canadian marijuana stocks to one of the most maligned marijuana stocks in a matter of months. Much of this dramatic shift in investor sentiment was due to the company's mistakes, although some of it stemmed from issues affecting the rest of the cannabis industry.

The situation for Canopy only worsened after the cannabis producer's fiscal 2020 second-quarter results were announced on Nov. 14. Canopy lost nearly 29% of its market cap last week, and its shares are now down nearly 50% year to date.

Some investors might think that Canopy Growth is a lost cause. But with the stock at its lowest point since late 2017, should you consider buying Canopy after its ugly Q2 results?

Giant marijuana leaf in a shopping cart.

Image source: Getty Images.

Near-term headwinds and tailwinds

One key argument against buying shares of Canopy Growth right now is that the headwinds impacting the stock throughout much of 2019 haven't yet died down. The biggest problem for the company is that it continues to lose a lot of money and doesn't appear to be on a path to profitability anytime soon.

The greatest industrywide headwind for Canadian cannabis producers -- the lack of adequate retail infrastructure, especially in Ontario -- won't be resolved in the near term, either. And international medical cannabis sales, while increasing, aren't growing fast enough to offset the challenges in the Canadian market.

However, there are reasons to hope for improvement over the next several months. Canopy Growth CFO Mike Lee said in the company's Q2 conference call that Canopy is "coming off of a major phase of investment from Canada, and we are literally in the final stages of that and paying bills on the last part of it." This lower level of capital expenditures should improve Canopy's bottom-line performance.

Ontario plans to issue more licenses for retail stores, a move that should help Canopy Growth significantly. The company is even planning on a rollout of 40 new stores per month beginning in January. Even if that's an overly optimistic projection, Canopy should soon enjoy a solid catalyst.

Don't forget the cannabis derivatives market that's about to be in full swing. Canopy is launching over 30 new products, with another 20 or more products coming in 2020, including beverages, edibles, and vapes. It remains to be seen how successful these new products will be, but the company should see a nice bump in sales next year.

Canopy Growth is also preparing to launch CBD products in the U.S., another potential growth driver. CEO Mark Zekulin said in the company's Q2 conference call that Canopy expects to launch new CBD products in the U.S. market "before the end of this fiscal year," or by March 31, 2020. 

Long-term prospects

Over the long run, Canopy Growth's growth will come outside of Canada. That's why the company's early forays into international markets are extremely important.

The big prize, of course, is the U.S. marijuana market. Canopy Growth is arguably the best-positioned Canadian cannabis producer to jump into this market when federal laws permit. It already has hemp CBD operations. The deal to acquire Acreage Holdings gives Canopy a vehicle to immediately move into the U.S. marijuana market should the legal environment change. Canopy also has a partner, Constellation Brands, with an extensive retail distribution network within the U.S.

When will U.S. federal marijuana laws change? No one knows for sure. Public support and political support have grown tremendously for marijuana legalization. Bills have been proposed in both houses of the U.S. Congress to change federal laws. However, the political process can move very slowly. It seems likely that U.S. federal laws will at least be revised to recognize the rights of states to make their own decisions on marijuana legalization at some point over the next several years -- but how many years that will be is a complete guess.

The global legal cannabis market should generate sales of $100 billion and perhaps much more over time. Despite its current problems, Canopy Growth should be able to capture a significant share of this market.

Is the stock a buy?

Some questions require nuanced answers. The question as to whether or not to buy Canopy Growth is one of them.

If you're a risk-averse investor, Canopy Growth isn't a good pick for you. The stock is likely to be very volatile for a long time to come.

However, if you're an aggressive investor who's willing to sit tight for several years in the midst of tremendous volatility, I think buying a small stake in Canopy Growth could pay off. My view is that Canopy's financial performance will improve significantly over the next couple of years. And I think the company will be worth a lot more than its current market cap over the long term.

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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