Marijuana stocks began the year on a promising note, and it's not hard to understand why. Canada had legalized recreational marijuana in mid-October, and Wall Street's expectations for the pot industry remained lofty. With worldwide revenue forecast to hit $50 billion to $200 billion annually by 2030, perhaps it's no surprise that cannabis stocks soared in the first quarter.

However, their performance since then has been dreadful. Most brand-name marijuana stocks have lost at least half of their value, with the largest pot stock in the world, Canopy Growth (NYSE:CGC), shedding over $10 billion in market cap and 65% of its share price since hitting its closing high on April 29. With the most prominent cannabis stock now trading at levels investors haven't seen in two years, the question needs to be asked: Is it time buy?

An up-close view of a flowering cannabis plant growing in a hybrid greenhouse.

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The buy thesis

Let's begin with the key reasons investors might consider dipping their toes into the pond.

For starters, Canopy Growth has the largest cash war chest of any marijuana stock. The company ended the most recent quarter with $2.74 billion Canadian ($2.06 billion) in cash, cash equivalents, and marketable securities. Put another way, cash makes up almost a third of Canopy's current market cap.

The bulk of this cash was derived from an equity investment from Constellation Brands, the company behind the Modelo and Corona beer brands. Constellation, which has made three investments into Canopy, went for the gusto with its $4 billion equity stake that closed in November 2018, giving it a 37% stake in the company. Canopy has actively put this capital to work by making acquisitions and building out its domestic and international infrastructure.

Second, but building off of this first point, Canopy Growth has the second-largest overseas presence of any pot stock. Including Canada, the company has a presence in 17 countries. With most of these being export or production agreements, Canopy Growth has positioned itself to succeed if and when Canadian dried cannabis becomes grossly oversupplied and commoditized.

Third, Canada is just a few weeks away from seeing the first cannabis derivatives hit dispensary shelves. Derivatives, such as edibles, infused beverages, and vapes, are a considerably higher-margin product than traditional dried cannabis flower, which should lead to more meaningful margin improvement for Canopy (and its peers).

And fourth, the company's Tweed brand is perhaps the best-known of all cannabis brands throughout Canada. Canopy Growth has always been particularly good at marketing its existing brands and building up new and acquired brands. When factoring in that the company has supply deals with all of Canada's provinces, it appears to be in good shape to deliver market-topping sales growth over the next decade.

But there's another side to this story.

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The avoid thesis

There's little question that the biggest reason to avoid Canopy Growth is the company's operating results. We've moved past the point where promises yield sustainable stock gains. With marijuana legal to our north, Wall Street and investors want to see tangible returns, which they're simply not getting from the company at the moment. In particular, Canopy's margins have been among the worst in the industry, with its share-based compensation coming in higher than its net sales (which includes an inventory charge) in the fiscal second quarter. Canopy Growth might be one of the last marijuana stocks to turn profitable on an operating basis.

Another pretty sizable issue for the company, and the entire Canadian weed industry, is the persistent supply problem in Canada. The country can't simply flip a switch that allows Health Canada the ability to work through its licensing backlog in the blink of an eye. We're also unlikely to see Ontario license an adequate number of dispensaries anytime soon. While many of these supply issues are fixable, they're going to take a while, which means ongoing losses for Canopy.

The company's balance sheet also looks dangerously bad. Sure, Canopy Growth is sitting on a boatload of cash, but it's also burned through approximately CA$2.2 billion in a nine-month span. What's arguably worse is that the company is lugging around CA$1.91 billion in goodwill following numerous acquisitions. I find it highly unlikely that Canopy Growth will be successful in recouping a significant portion of this goodwill, which could lead to significant future writedowns.

And let's not forget that Canopy Growth is without a true captain, for the time being. The company's board fired visionary co-CEO Bruce Linton in early July, and current CEO Mark Zekulin will step down once a permanent replacement is found. This effectively throws the company's long-term strategy out the window and replaces it with who knows what at this point.

Silver dice that say buy or sell being rolled across a digital screen with stock charts and price data.

Image source: Getty Images.

The verdict

Now that we've covered both side, it's time to circle back and answer the original question: Is it time to take a position in Canopy Growth?

My answer is no.

While I appreciate the company's cash position and having supply deals with every Canadian province, its aggressive expansion plans are unlikely to pay dividends anytime soon. Canopy's overseas markets aren't generating much in the way of revenue, and former co-CEO Linton's generous share-based compensation to employees has put the company in a huge hole, as evidenced by its abysmal income statements.

Furthermore, Canopy's cash isn't the buffer everyone thinks it is. With the speed at which the company has been burning through capital, this cash could be gone sooner than folks realize.

But in my mind, the biggest threat is the possibility of a goodwill writedown. Following a number of recent amendments to pending acquisitions in the U.S., it's become apparent that Canopy almost certainly overpaid for its already completed deals. With goodwill now accounting for 23% of total assets, it's only a matter of time before Canopy admits what Wall Street already knows and writes off a significant chunk of this collective premium it paid for its acquisitions.

For now, this is a stock to continue avoiding.