Canopy Growth (CGC) stock began the week trading at a little more than $8 per share. The last time its shares were trading lower than that was during the fall of 2017. The pot stock has made early investors rich, but those who bought shares when Canada legalized marijuana in 2018 have lost big.
Below, I'll look at whether the stock is a good discounted buy or whether it's too risky to buy and destined to fall lower.
What's gone wrong with the business?
A quick look at Canopy Growth's financial statements show us the problem. Sales have been slowing down, and despite the company focusing more on the bottom line and shedding costs, it's nowhere near profitability.
In the trailing 12 months, Canopy Growth has incurred a loss of more than 1.2 billion Canadian dollars. Its operating loss of CA$591 million during that period is nowhere near breakeven. It has burned through CA$437 million in cash from its day-to-day operating activities. And in its most recent quarter, for the period ending Sept. 30, 2021, the company failed to generate any year-over-year revenue growth, with sales of CA$131 million declining 3% from the prior-year period when the top line came in at more than CA$135 million.
Cash burn and a lack of profitability aren't new problems for the sector, but at least during the sector's infancy (Canada legalized marijuana in 2018), sales were growing and things looked great. In fiscal 2020 (Canopy Growth's year ends in March), revenue of CA$399 million rose by 77%. In fiscal 2021, sales of CA$547 million rose at a slower rate of 37%. Now, over the trailing 12 months, revenue has totaled CA$569 million and it's questionable whether fiscal 2022 will come in higher than the previous year.
For Canopy Growth investors, the one sobering thought may be that at least they haven't been alone in their roller-coaster ride.
Other cannabis companies are struggling, too
If you look at the past year, shares of many large pot stocks are down big, especially when you consider that the S&P 500 has risen more than 20% over that time frame. But, unfortunately, Canopy Growth's losses have been far deeper than its peers:
In short, it's been a dreadful time to be investing in the cannabis industry. Amid saturation and operating in a highly regulated cannabis market that offers next to no opportunity for advertising, top marijuana producers in Canada have found it difficult to generate consistent revenue growth. That's led to growth investors looking elsewhere to add stocks to their portfolios.
The situation is so bad that a report from cannabis site MJBizDaily found that from 2018 to 2020, Canadian pot producers destroyed more than 447,000 kilograms of unpackaged dried cannabis because they are producing far more than they can sell. At just under 280,000 kilograms in 2020, that figure jumped 80% from the previous year.
Its focus is on the U.S. market
The big advantage Canopy Growth has over its peers is that it is in a great position to penetrate the U.S. market, assuming that the country eventually opens up and legalizes marijuana. The pot producer has multiple deals in place to expand in the U.S. once it gets the green light to do so, including its pending acquisition of multi-state marijuana operator Acreage Holdings. It also recently announced that it is looking to buy Wana Brands, which it says is, "the #1 cannabis edibles brand in North America."
Plus, it has a key investor and partner in beer maker Constellation Brands that owns a 38.6% stake in its business and that has plenty of incentive to help keep Canopy Growth afloat if it continues to bleed cash. But for the time being, that shouldn't be an issue as the pot producer has CA$2 billion in cash and short-term investments as of its most recent quarterly results.
Is Canopy Growth worth the risk?
In the near term, there's definitely the potential for Canopy Growth stock to fall even further down, especially with growth stocks under fire in recent months and investors becoming concerned about rising interest rates. Only if you're willing to wait for the U.S. market to open up for Canopy Growth -- which could take several years, despite the company's optimism -- should you consider holding this stock. At a multiple of more than seven times revenue, it still trades at a higher premium than rivals Tilray and Aurora Cannabis, which investors are paying just four and six times their sales for, respectively.
Canopy Growth is a risky investment to hold and while its low price may be tempting, it wouldn't be surprising for things to get even worse before they get better. And unless you're willing to hang for what could be a long and bumpy ride, you may be better off looking at more promising growth stocks to invest in right now.