Cannabis producer Canopy Growth (CGC 2.30%) first began trading on the NYSE back in 2018. At the time, there was lots of excitement surrounding the company, and marijuana legalization was just months away in Canada. That would also end up being the year where beer maker Constellation Brands invested $4 billion into Canopy Growth.
It's unfortunately been a bumpy ride for the cannabis company since then. How much would a $10,000 investment in Canopy Growth back then be worth today? And has the stock become a better buy over the years?
Canopy Growth stock was worth nearly $30 then
Canopy Growth's stock began trading on the NYSE in May 2018 (it has since moved onto the Nasdaq). At the end of the month, it closed at a price of $28.37. If you bought the stock then, a $10,000 investment would have allowed you to purchase approximately 352 shares of the business.
As of Oct. 4, the stock price was trading at just $3.10, those shares would be worth just $1,091. That's a mammoth decline of nearly 90%, making it a terrible investment to hang on to during that time frame.
What went wrong for Canopy Growth?
Canopy Growth's decline happened because expectations simply didn't align with reality. The company had overly bullish forecasts for the future that failed to materialize.
In April 2019, then-CEO Bruce Linton forecasted the company would generate 1 billion Canadian dollars in revenue for the 2020 fiscal year. Even today, the company is nowhere near that mark; in the trailing 12 months, Canopy Growth's revenue has totaled CA$494 million -- less than half that amount.
Another overly optimistic forecast was that Linton expected Canopy Growth to saturate Ontario, its home province, with pot shops. In 2018, he believed the company would have 400 stores by the end of 2019. Retail was supposed to be a big strategy for the business, and so it was surprising last month when the company announced it was divesting from its Canadian retail operations for the sake of improving its prospects for profitability.
Over the years, Canopy Growth has been focusing on growth at all costs, and profits were always on the back burner. And while legalization, which occurred in October 2018, did give the company's revenue a big boost, sales have been trending downward of late:
CGC Revenue (Quarterly YoY Growth) data by YCharts
The hope for investors today is that the U.S. legalizes marijuana, which would pave the way for Canopy Growth to enter a new market and again see a boost in sales. Canopy Growth has made tentative deals with multiple companies, contingent on U.S. legalization. One of the biggest such deals it announced was back in 2019 to acquire Acreage Holdings, which can't be completed due to the federal ban on pot in the U.S.
Is Canopy Growth a buy today?
Canopy Growth's new CEO, David Klein, who came over from Constellation Brands in 2020, has been working to reduce costs. However, I still see the warning signs of an overly bullish CEO. In early 2021, Klein forecasted that Canopy Growth would enter the U.S. cannabis market within a year. And although there has been a change in government with Democrats now in control, there hasn't been any sign that legalization is a priority for President Biden or that it will take place under his administration, even though cannabis use has been on the rise.
And as for the company's results, there really isn't much to get excited about. For the period ending June 30, the company's net revenue of CA$110.1 million nosedived 19% and the company's net loss totaled just under CA$2.1 billion as impairment losses were prevalent yet again in the business, saddling Canopy Growth with CA$1.7 billion in expenses. Impairment has been a cost that has shown up a little too often on the company's financials, but even without it, the company would still be nowhere near profitable given that its gross margins this past quarter were negative.
Canopy Growth still has a lot of work to do before investors should consider buying shares of the company. There are simply much better growth stocks out there to choose from.
