This year started out great for Canopy Growth (CGC 20.65%). The marijuana producer was riding the hype surrounding marijuana legalization in the U.S., hitting a 52-week high of $56.50 on Feb. 10. But it's been a slow burn over the past four months, with the Canadian pot stock losing more than half of its value since then.
Canopy Growth is now in a new fiscal year, one full of hope and expectations for profitability. But can investors expect shares of the company to rebound and get back to the highs they hit earlier in 2021, or is it time to dump this stock once and for all?
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What likely needs to happen
Pot stocks can rise in value fairly quickly even if their financial results don't warrant the bullishness. And that's because anytime there are developments related to marijuana legalization in the U.S., investors often rush out to buy out shares of Canopy Growth and other Canadian producers that could stand to benefit from accessing the U.S. market. But bringing Canopy Growth to the $50 mark -- and keeping it there -- will take more than just an overload of bullishness related to legalization.
With a loss totaling more than 1.7 billion Canadian dollars in its most recent fiscal year (which ended March 31), there's no mystery as to why many investors have been shedding their investment in the company lately. Its revenue during that time frame totaled CA$547 million -- up 37% year over year -- but that wasn't enough for investors to overlook the problems on the bottom line. Even after backing out impairment costs and other losses not related to its operations, the company's adjusted EBITDA loss of CA$340 million was still deep in the red. For just the fourth quarter, its loss was CA$94 million.
That's not good enough for investors, not when a minnow like Sundial Growers (which at a market cap of $1.6 billion is less than one-fifth the size of the Canadian pot giant, even while getting lots of help from retail investors) is able to achieve an adjusted EBITDA profit in its most recent results. Canopy Growth says it will be in the black in the second half of this new fiscal year. If it indeed hits that target, investors may rally behind the stock and get it back up near its 52-week high. But the key question may be whether the company will be able to do that with its Canadian operations, or if it will need help from the U.S. pot market. In the most recent earnings release, CEO David Klein talked about "capitalizing on U.S. opportunities in fiscal 2022."
Will the company reach its goal?
From reading into the company's most recent results, I would be concerned that management is already working on a built-in excuse for when it fails to meet expectations. Mentioning U.S. legalization for fiscal 2022 suggests to me that the market will play a key part in Canopy Growth's profitability this fiscal year. The company does have a pending deal with U.S. pot producer Acreage Holdings that it would be able to execute should legalization take place in the U.S.
And in its most recent quarterly results, for the period ending March 31, Acreage posted an adjusted EBITDA profit of $1.6 million. While not a huge boost, that would be accretive to Canopy Growth's bottom line. The pot producer is also banking on improving its margin with the recent acquisition of Supreme Cannabis, a Canada-based cannabis company that has posted an adjusted EBITDA profit for the past three straight quarters.
But none of these companies are hugely profitable, certainly not enough to instantly wipe out Canopy Growth's significant losses. Plus, acquisitions bring the challenge of incorporating these businesses, eliminating any redundancies and inefficiencies along the way that could otherwise make it harder to keep operations lean and efficient. It's enough of a challenge as it is for the company to hit breakeven. And given how aggressively it would likely pursue growth opportunities in the U.S., assuming they open up, I'm not convinced its focus on keeping costs down and working on margins would remain intact if the U.S. legalizes pot -- in fact, profitability may be even more unlikely under that scenario.
Meanwhile, if the U.S. pot market doesn't open up, it gives Canopy Growth a convenient excuse for any subpar results. Earlier this year, Klein was "confident" that his company would enter the U.S. within a year. Midway through that projection, little has happened to suggest it will become a reality.
Getting back to $50 looks like a long shot
It would be wishful thinking to expect Canopy Growth will get back near its 52-week high this year, as that would suggest it is ahead of schedule in reaching profitability. If there's positive news that sends the entire sector up sharply, then I certainly wouldn't be surprised if Canopy Growth comes along for the ride. But on its own merits, Canopy Growth likely won't deliver the strong results investors will be looking for to convince them that the company has finally figured things out. Analysts aren't much more optimistic, with Piper Sandler recently lowering its price target for the stock from $27 to $24.
Canopy Growth isn't a stock I would gamble on. The company's CEO is too focused on the U.S. market, a move that could end up backfiring. If you want to invest in the U.S. marijuana market, you are better off buying shares of cannabis companies that are already operating there.
