With ambitions to sell its consumer packaged goods across the world, Canopy Growth (CGC -2.55%) is more than a mere Canadian marijuana company. Despite those ambitions, it hasn't been a great investment, with its shares down by 77.6% in the last five years.
Moving forward, the company's issues with both growth and profitability make it a risky pick. Let's take a look at three things that smart investors are likely to already understand about the stock that will likely influence the decision-making of anyone considering whether to make a purchase.
1. Its top-line growth isn't anything to write home about
Smart investors stay focused on data rather than hype, and for Canopy, the data says its revenue growth is frailer than might be hoped. In the first quarter of the fiscal year 2023, its total revenue fell by 19%, reaching CA$110.1 million. That was only the latest in its declining pace of expansion, as, over the last three years, its quarterly revenue fell by more than 8%. For a putative growth stock, a shrinking top line is bad news, to say the least.
Management attributes the fall to an intentional plan to reduce sales of its least profitable segments, namely its dry cannabis flower products that are priced cheaply. But that leaves out the wider conditions in the Canadian recreational cannabis market, where many companies have been struggling to get consumers to buy their products in larger volumes over the last year or so. With so much cannabis on the market and slack demand, it's no surprise why Canopy is facing pressure to cut its prices.
In other words, Canopy isn't alone in its top-line difficulties, but that isn't much of a comfort for investors, and there might be more damage to come. Still, smart investors probably also recognize that the Canadian cannabis market's mismatch between supply and demand is temporary, as eventually, companies will slash production.
2. "Premiumization" isn't leading to higher margins very quickly
As hinted at in the prior section, smart investors recognize that part of Canopy's strategy is to "premiumize" or shift its product mix from low-margin products, like dried marijuana flower cultivated from common strains of the plant, to higher-margin ones, like vaporizers, flower from premium cannabis strains, and edibles. If that plan was working, we'd see its gross margin rising over time, but instead, the opposite is happening, even in time frames of three years and beyond. That's a problem that smart investors are already appraised of, and it's a valid reason to avoid buying the company's shares.
Likewise, smart investors know that Canopy isn't the only cannabis company attempting to premiumize its product lineup. And the consequence of having competition in a given market segment is typically margin compression, which means that premiumization, while still desirable, probably isn't going to be a panacea.
3. Beverage sales are rapidly becoming a major revenue segment
Canopy makes more than marijuana; it also sells BioSteel sports beverages that don't have any cannabis component. BioSteel sales are exploding, with the first quarter seeing an increase of 169% compared to the prior year, bringing in CA$17.9 million. That means it was worth more in the period than any of its other revenue segments, with the exception of dried cannabis flower destined for sale in the Canadian recreational market.
Smart investors appreciate the value of diversification in a business' base of revenue, and they also see that sports beverages could be a driver of growing value for the foreseeable future. The biggest complication with BioSteel is that the sports beverage market is already quite saturated. It could still find a share of the market, but it's hard to see how BioSteel could become the next Gatorade or the next Powerade without dedicated spending to beat the competition.
