If you had invested $5,000 in Canopy Growth (NASDAQ:CGC) on the day of its trading debut in May 2018, that investment would be worth just $2,762 as of Oct. 8 -- a devastating 45% loss. At one point in time, the principal would have been worth more than $10,000 due to excessive speculation in the Canadian marijuana market. Now, that bubble has popped, and many investors are left wondering whether they will ever recoup their capital.

As it turns out, the problems that caused Canopy Growth's spectacular fall are still lingering. Even the billion-dollar investment made in the company by Constellation Brands (NYSE:STZ) may not be enough to reverse the trend. Let's look at why investors should look past Canopy Growth and choose other marijuana stocks today. 

Expanse of marijuana plants grows outdoors, each plant propped up by a stake atop special growing materials

Image source: Getty Images

Struggling operations

In the first quarter of 2021, Canopy Growth's sales increased by 22% year over year to $110.4 million Canadian dollars, primarily driven by the 92% growth witnessed in its international medical cannabis segment. Its hemp and recreational cannabis sales, however, saw significant headwinds. Because of ongoing oversupply issues in the Canadian marijuana market, the price of dried flower cannabis has deflated by about 15% year over year.

Additionally, Canopy Growth only produced 22,990 kilograms (kg) of cannabis in the quarter, down significantly from the 40,960 kg it posted in Q1 2020. The company closed down two of its production facilities in British Columbia due to a lack of consumer demand.

While Canopy Growth's revenue increased, its profitability wasn't able to catch up. The company's gross profits declined to CA$6.5 million during the quarter, down abut two-thirds from Q1 2020. On the other hand, its selling, general, and administrative (SG&A) expenses rang in at over CA$135 million. Canopy Growth also issued CA$30.7 million in share-based compensation expenses and recorded CA$12.8 million in asset impairment and restructuring expenses.

If all that wasn't bad enough, Canopy Growth also has CA$390 million in inventory on its balance sheet and recorded a writedown of CA$19 million in unsold goods during Q1 2021. Although the company is trying to attain No. 1 or No. 2 market share status in Canada and Germany, it is having trouble sticking to expansion plans in the increasingly competitive U.S. market for cannabis.

Out-of-this-world valuation

Canopy Growth's financial situation is not improving. During Q1, the company used up CA$327.3 million worth of cash, not accounting for the CA$245 million in cash it received via the issuance of new stock. Without a reversal of luck, Canopy Growth's CA$2 billion cash and investments will shrink quarter by quarter. The company also has CA$500 million worth of debt, CA$285 million in acquisition liabilities, and CA$287 million in warrants to account for.

Despite its declining financial health, Canopy Growth is still trading at a stunning 20 times price-to-sales (P/S) and 1.6 times price-to-book value (P/B) -- meaning that a large portion of its shareholders' equity consists of goodwill. Meanwhile, the company has continued diluting shareholders to raise more cash to pay for its unprofitable expenses. Currently, Canopy Growth's valuation is one of the most expensive in the industry, with competitors Aphria (NASDAQ:APHA), Aurora Cannabis (NASDAQ:ACB), and Green Thumb Industries (OTC:GTBIF) trading at P/S ratios of just 3.7, 2.4, and 8.5, respectively. Now may be a good time to consider alternative investments instead of Canopy Growth. 

A never-ending wait for returns

Since mid-2018, Canopy Growth's shares outstanding have increased from about 200 million to more than 371 million. That's nearly double the number in a little over two years. If you're a marijuana investor looking for sector stocks with substantial growth, excellent financials, and a track record of protecting shareholders' capital, I'd quickly pass over Canopy Growth as an option. And if I'd invested $5,000 upon the company's IPO two years ago, I wouldn't hold my breath waiting for that investment to double.

Luckily for investors, the company isn't doomed by any means. With the help of Constellation Brands, Canopy is set to release its cannabis beverages in the U.S. next year. The company sold an astonishing 1.5 million cans after the beverages' launch in Canada last December. Although now is not a good time to get in Canopy, it may be a good idea to add it to one's watchlist in case the company makes a turnaround in the future. 

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.