As well as Canopy Growth (NYSE:CGC) has grown over the years, it has struggled to stay out of the red, burning through a lot of cash along the way. And that's why it's not surprising that shares of this top pot stock are down around 70% over the past year, which is only marginally better than the Horizons Marijuana Life Science ETF's 72% decline during the same time frame. There's been a lot of change happening at the company. In March, Canopy Growth announced that it would cut 500 jobs, and in April it said it would be shutting down its growing facility in Yorkton, Saskatchewan. The company's biggest move came nearly a year ago when it fired CEO Bruce Linton.
However, there's reason to be bullish on Canopy Growth's stock, and it's not only because it's so much cheaper than it was a year ago. The company's making moves that should set it up for better results in the future, and that could make the stock a very appealing investment today.
Canopy makes significant changes to global operations
On April 16, Canopy Growth announced that it would be scaling back its presence around the world. In Africa, the cannabis producer will be exiting its operations in South Africa and Lesotho. And while it's staying in Latin America, the company will shut down its cultivation facility in Colombia and said that it would be "moving to an asset-light model that leverages local suppliers for raw materials." Even in the U.S. market, Canopy Growth is going to cease farming operations in Springfield, New York as it says it produced more than enough hemp in 2019. While Canopy's not exiting the U.S., it's also not going to continue stockpiling hemp.
These are the first significant moves made by Canopy Growth's new CEO David Klein, who took over earlier this year. He previously served as the chief financial officer of Constellation Brands (NYSE:STZ), which invested $4 billion in the cannabis producer back in 2018.
Two of the areas that he's focused on improving are cash burn and the company's cost structure. The changes announced earlier this month will certainly help on both fronts. They allow Canopy Growth to focus more on its domestic market where the bulk of its operations are. In Colombia, the company will be more efficient with its production process. And while it may be appealing from a growth perspective to have a footprint in Africa, it's arguably far too early to be worrying about operations in Lesotho, a country with a population of only 2.1 million people. At 58 million people, South Africa is a much bigger and promising market, but it remains illegal to sell cannabis there and it's not clear when that might change.
Over the nine-month period ending Dec. 31, Canopy Growth generated 47.3 million Canadian dollars from international medical marijuana sales, which was 14.6% of its gross revenue of CA$324.6 million. In the prior-year period, international medical marijuana sales totaled just CA$8.3 million. And the company says that impressive growth came primarily due to its acquisition of the German pharmaceutical and cannabinoid company, C3. That suggests that the company's international medical marijuana sales and its presence in other parts of the world, outside of Germany, is still fairly insignificant.
The good news is that the recent decisions announced by Canopy Growth aren't likely to have a material impact on the company's growth or sales numbers this year or in the near future. But they could help cut costs and improve its bottom line -- the pot producer's reported a net loss in each of the past four quarters. That's why for investors, these are very good decisions that suggest the company's management is moving in the right direction to improve its financials which, in turn, should help the stock price gain some traction.
Why now could be a great time to buy Canopy Growth
Shares of Canopy Growth aren't at their 52-week lows, but the stock is still trading at a significant discount to where investors have valued it in the past. Here's how it looks in terms of its historical price-to-sales ratio:
The stock is a much cheaper buy today than it's been in the past. Another reason to be bullish is that sales may continue to be strong this year, even amid the coronavirus pandemic, which could help bring this multiple down even more. Data from the Ontario Cannabis Store is showing that demand in April is still strong as orders are nearly five times the levels they were before the outbreak of COVID-19. The data is from just one province, but it's an encouraging sign nonetheless.
With CA$1.6 billion of cash and cash equivalents as of Dec. 31, and a strong partner like Constellation Brands, Canopy Growth is in good shape to weather the storm ahead.
It's one of the safe bets in the industry to sustain itself during this pandemic. Buying the pot stock near its low today could set investors up for some strong returns when the Canadian and U.S. economies start getting back to normal and when the priority for cannabis investors is back to investing in pot stocks with strong growth prospects, rather than just ones with adequate cash flow. That may take a year or two to happen, but it wouldn't be all that surprising to see Canopy Growth's stock double in value from where it is today given the company's relatively low valuation and its opportunities for continued growth.