Canadian marijuana company Canopy Growth (CGC 0.77%) sells everything from raw cannabis flowers to THC-infused beverages and cannabidiol hand creams. With its diverse collection of brands, it's among the industry's stronger competitors, and its stock is popular among some groups of investors. But like many cannabis companies, it isn't profitable, and its shares are down by more than 12% year to date, far underperforming the broader market.

Does this cannabis company have what it takes to become profitable and deliver the growth that its investors are seeking? Or are its problems the result of intractable internal issues and a business plan built around an expectation of low production costs that it can't deliver in reality?

In my view, Canopy Growth has promise as a result of its demonstrated capability to expand into new markets, but its penchant for overspending on building additional manufacturing capacity makes it a risky investment.

A field of cannabis plants sits before a rising sun.

Image source: Getty Images.

Cannabis beverages gain momentum

One thing many investors appreciate about Canopy is its strong market position. In Germany, it's the top supplier of dried marijuana flower, and it's among the leaders in the U.S. and Canadian markets as well.

Its net sales grew by 22% year over year last quarter, led by its lineup of cannabis-infused beverages for adult recreational use. If cannabis legalization proceeds in the U.S., it's possible that Canopy Growth's revenues could continue to grow at a similarly rapid rate.

While the cannabis beverage segment is relatively new, Canopy has led the industry with its investments so far, creating four different brands of drinks and powder concentrates. In Canada, its beverages hold a 74% market share. However, it's important to recognize that right now, only 13% of company sales come from Canada, and just 1% of global revenue comes from products like beverages, so dominance in that niche of its domestic market is far from enough to carry the bottom line, or the share price, for now.

Next year, management plans to launch additional beverages and begin selling its existing ones in select U.S. states. It's plausible that someday, Canopy Growth could become known as the cannabis beverage company, but at the moment, the market is too new for any player to have gained a durable competitive advantage. Don't be too surprised if other companies notice its success and try to steal its market share, driving down profit margins in the segment in the process.

Slowly moving toward profitability

Like many other cannabis companies, Canopy Growth has struggled to reach profitability, in part because of its heavy investment in production facilities. To address this issue, it reduced its high-cost cultivation facilities in Canada throughout the year, curbing output capacity by 40%. It also terminated its cultivation operations in Colombia and New York, divested itself of its African assets, and canceled plans to expand production elsewhere. These actions were part of the company's larger plan to reduce its cash burn rate and focus on the most profitable segments of its business.

In the same vein, Canopy Growth has cut its workforce by 18% since the end of 2019. But with a profit margin of negative 297%, it still has a long way to go before breaking even. And with 10 new retail stores in Canada planned to open before the end of the year, it will need to carefully balance its competing goals of expansion and cost-cutting. This could prove challenging, especially if its revenue grows more slowly than expected.

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Is Canopy Growth worth a buy?

While I'm cautiously optimistic about this marijuana company as an investment in the long term, its progress toward profitability hasn't been as rapid as I would like, so I can't say that it's worth a buy right now. It has been less aggressive with production cuts and layoffs than somewhat weaker peers like Aurora Cannabis, (ACB 3.26%), and management hasn't articulated a clear plan for how it will reach profitability, even if its financial position is improving.

At the same time, its position in the cannabis-infused beverage market is strong, and it may be able to build a high-margin business in the segment. I won't buy now, but I'll be keeping an eye on Canopy Growth's earnings reports to see how its transition is coming along, and I'll revisit my decision if it looks like the company might be within a year of making more than it spends.