The next few months could prove pivotal for marijuana producer Canopy Growth (CGC 10.36%). The company will report earnings at the start of June, and its unofficial partner Acreage Holdings (ACRGF) is testing its beverages in the U.S. to evaluate the market waters. These are among a few significant catalysts that could impact Canopy Growth's share price over the coming months and determine its path for the rest of the year.
While shares of Horizons Marijuana Life Sciences ETF are up over 20%, shares of Canopy stock are down 5% year to date and trading around this year's lowest levels. Should you consider investing in Canopy Growth over the next few months, or is it still too risky?
What could happen over the next few months to impact Canopy Growth's share price?
Canopy Growth's upcoming earnings report, which it will release on June 1, closes out the company's 2021 fiscal year for the period ending March 31. During the most recent three-month period, Statistics Canada reports that retail cannabis sales in the country totaled 840 million Canadian dollars. That's up just 1.8% from the CA$825 million the industry generated in the previous period.
There wasn't a whole lot of growth for the sector. So this coming quarter will be a big test to see if Canopy Growth is gaining market share and if it can keep its streak of positive quarter-over-quarter sales growth going -- which currently sits at three. In the third quarter, which ended December 31, sales of CA$153 million were 13% higher than they were in the previous period. And on a year-over-year basis, the growth rate was 23%.
Of particular importance is how the company performs in the cannabis-infused beverage sector products. In Q3, the company reported that its share of that segment in Canada was 34%. Partnering with Constellation Brands on beverages should help put the company among the leaders in the beverage market. But it isn't going to be easy to dominate the market now that HEXO and Molson Coors have formed a joint venture -- Truss CBD. In April, Truss reported its products captured 43% of the market.
It's not just the Canadian market investors will want to watch. In October 2020, Canopy Growth announced that Acreage Holdings (which it is planning to merge with if the U.S. legalizes pot at the federal level) will launch the company's beverage offerings south of the border. It's a great way to test the waters, and if that helps Acreage generate strong growth, it could be a sign that Canopy will do well once it can enter the THC market in the U.S. That would definitely give the pot stock a big boost.
Yet another factor that could impact Canopy Growth's share price over the next few months is its acquisition of Supreme Cannabis (SPRWF). It announced the deal in April, and Supreme's shareholders will vote on it in June. If all goes well, the transaction could be completed by the end of the month. Canopy Growth believes the deal will improve its profitability prospects by incorporating the company's premium products into its portfolio. For the first three months of 2021, Supreme's net revenue of CA$13.6 million declined by 26% from the previous period. But one reason the business is attractive is its strong bottom line; despite the drop in sales, adjusted EBITDA was positive at CA$460,000.
Should you consider buying Canopy Growth stock over the summer?
Shares of Canopy Growth haven't been this low since November 2020, before the U.S. election, which sparked a lot of enthusiasm in the industry and sent many pot stocks on strong rallies in the hope that marijuana legalization could soon be on the way. Now that the hype has died down, investors have the chance to buy back in at those prices again. But with a forward price-to-sales multiple of 13, Canopy Growth's stock still trades at nearly double the premium (seven) that revenue giant Tilray does. (After its merger with Aphria, it became the largest cannabis company in the world in terms of sales.)
While there are some key developments to watch over the next few months that could send Canopy stock back up, none of them are compelling reasons to buy it right now. The company has disappointed investors in the past, and the CEO has been making ultra-aggressive forecasts of operating in the U.S. within a year. It's hard to believe the stock can outperform, given the sky-high expectations.
With Canopy Growth, investors have been burned enough times that they should wait for the results to come in rather than believing beforehand the company will perform well. If Canopy Growth delivers strong Q4 numbers and its beverages gain more market share in Canada, only then should investors consider buying shares of the company. Jumping the gun could lead to investors taking on significant risk and potentially incurring sizable losses.