A big reason investors are bullish on Canopy Growth (CGC 3.65%) are its prospects for growth in the U.S. once the market opens up. The company has been wheeling and dealing over the years in preparation for when the U.S. legalizes marijuana and lets in Canopy Growth and other Canadian cannabis companies.
But sometimes that excitement can lead to overly optimistic expectations and forecasts. It is now two years since Canopy Growth Chief Executive Officer David Klein made this prediction: "We're pretty confident we'll be operating in the U.S. a year from now."
What drove that optimism?
There was significant hope that after Joe Biden was elected president in 2020 and with the Democrats in power, that nationwide legalization would follow. And there was even more bullishness after runoff election results in Georgia indicated that the Democrats would control both the House and Senate.
As those results were coming in on Jan. 6, 2021, shares of Canopy Growth jumped 12%, and trading volume spiked from 5.3 million shares the day before to 24.9 million.
There was clearly lots of excitement on the news, and it was around this time Klein made his prediction. Things haven't panned out that way, however, as there hasn't been significant reform since then.
There have been other priorities for the federal government to focus on since then (the pandemic and inflation providing two glaring examples), and even the SAFE Banking bill, which would make it easier for cannabis companies to do business with big banks, has failed to become law.
It has been a huge disappointment for the cannabis industry during what should have been a golden opportunity for reform.
It's a reminder for cannabis investors to temper expectations
Klein's bullishness isn't anything new for the cannabis industry, where expectations can sometimes be a bit too ambitious. Cannabis investors need to be careful to not buy pot stocks on the expectation that those predictions, especially relating to something as complicated as legalization, will come true.
If you invested in Canopy Growth just after Klein made his prediction in 2021, you would be down an incredible 91% right now.
What matters is the here and now, not hopeful expectations of legalization. It can take a long time for governments to pass legislation, and something as significant as marijuana legalization will not be done quickly.
Instead, investors are better off evaluating the merits of Canopy Growth's business, which today simply don't look all that great. Sales have been falling and operating losses have remained deep in the red.
CGC revenue (TTM) data by YCharts; TTM = trailing 12 months.
Without strong financials today, Canopy Growth isn't setting itself up for success down the road. In the trailing 12 months, the company has burned through $568 million Canadian dollars ($424 million) just to fund its day-to-day operations.
Regardless of how bullish investors may be on the long-term strategy for Canopy Growth, it might not be able to take advantage of those opportunities when they come up if its financials aren't strong. That's why it's important not to overlook the state of the company's current operations.
Should you invest in Canopy Growth today?
Unless you're incredibly patient and can accept the risk that marijuana legalization in the U.S. doesn't happen for years, and are ready to accept the possibility that it doesn't happen at all, then you're better off steering clear of this pot stock.
Its financials just aren't great today, and the company could even risk getting delisted by Nasdaq if it goes ahead and consolidates the U.S. businesses it has deals with before legalization takes place. There are simply much safer growth options than Canopy Growth and in the cannabis industry as a whole.
