With the Biden Administration making noises in early October that indicate marijuana prohibition could be on the way out, a new heyday of cannabis investing might be lurking just over the rapidly approaching horizon.
It remains to be seen exactly what will happen due to the administration's instructions for the Department of Justice to review the scheduling of marijuana, which is federally a Schedule I drug (in the same category as heroin). But the fact that many states now allow legal sales of pot is sure to be a factor in their decision making.
And progress toward decriminalization or legalization is exactly where a heavily bruised cannabis stock like Canopy Growth (CGC -3.01%) just might have an opportunity to make a sharp turnaround. But will Canopy be able to recover from its recent collapse, or is it too late for investors to make a profit given its issues with maintaining revenue growth over time?
Why there's reason to believe it's too late
The most relevant reason why it's probably too late to buy this stock is that Canopy's business is taking a beating, and there's no end in sight. The company's shares fell by 81.7% over the last 12 months, deeply underperforming the market's contraction of 16.4%, and if you look at its financial performance, it isn't too surprising that shareholders are getting shellacked.
Over the last three years, its quarterly revenue shrunk by around 8%, and in the same period its quarterly gross margin also deteriorated considerably. Practically all of its cannabis product segments experienced sharply declining revenue in the first quarter of its 2023 fiscal year compared to the same quarter in 2021, with its net revenue declining by 19% year over year. In other words, its top line is now shrinking even faster than the three-year data might suggest.
To its credit, for more than a year, management has been working to improve the company's margin performance by changing its product mixture to feature more higher-margin items like pre-rolls, cannabis beverages, edibles, and vapes. But margins aren't getting better over time, so that strategy doesn't appear to be working, which doesn't bode well.
Furthermore, in late September, Canopy announced that it was partly retreating from the Canadian recreational market by selling off its retail stores in the country. That should help reduce its overhead somewhat, which is needed.
Right now, it has around 1.2 billion Canadian dollars ($873 million) in cash holdings, whereas its trailing-12-month (TTM) cash outflows totaled nearly CAD$550.4 million. Slashing a few costs here and there won't bring it anywhere close to profitability anytime soon, though. And that suggests it's not only too late to buy Canopy's stock, but that it might be time for shareholders to sell.
A rally is improbable, but not impossible in the long term
Despite the above, there is a solid long-term argument for why it's not too late to buy Canopy stock. First, its BioSteel sports beverage segment is growing rapidly, with sales rising by 169% year over year in the first quarter, reaching CAD$17.9 million. That's a significant portion of the company's CAD$110.1 million in net revenue for the quarter.
So there's a chance that rising beverage sales and divesting its Canadian retail business could help to stabilize the decay of the top and bottom lines over the next year. Eventually, that could in turn lead to the stock rising again, though cannabis revenue would probably need to return to growth before that could happen.
As previously mentioned, the other reason why it's not too late to invest in this company is that cannabis legalization might be advancing in the U.S. with the Biden administration's decision to look into rescheduling marijuana from its highly restricted Schedule I status, which would give it huge new markets to achieve top-line expansion.
The same catalyst would be significant for pretty much any marijuana business operating in the U.S., so it's entirely possible that a competitor could take advantage of legalization more effectively than Canopy.
In short, there's a chance for Canopy's stock to shoot higher in the near term if legalization advances, and a separate chance that it'll slowly recover even without legalization if its margin and top-line issues abate over time. It isn't too late to invest with the hope of those outcomes catalyzing growth. In the long term, it could become a must-buy cannabis stock if its high-margin products end up gaining traction.
But unless you're happy to introduce its big risks into your portfolio, stay away from it for now, even if it isn't, strictly speaking, too late. There are other investments with fewer problems and far more hints of success on the horizon, even within the cannabis industry.
