Canopy Growth (CGC +5.96%) has been a sinking ship over the past few years. Its stock price has been steadily falling and there's little hope of a recovery. The company reported its latest financial results last month, and things are simply not improving enough for investors to get bullish about the stock. Even though it's one of the top cannabis producers in Canada, the business is in terrible shape. With its stock down more than 90% over the past few years, the company has a lot of work to do if it wants its valuation to recover.
The marijuana stock gets a big downgrade
Last month, one investment banking firm, Benchmark, set a price target of zero for Canopy Growth. Analyst Mike Hickey stated that Canopy Growth's focus on the U.S. market "could be a signal of desperation, given that the U.S. market remains federally illegal."
Canopy Growth's obsession with entering the U.S. isn't new, however. It was 2019 when the company first unveiled plans to acquire multi-state cannabis company Acreage Holdings as Canopy Growth looked to enter the U.S. pot market as quickly as possible. The one hiccup, of course, is that marijuana remains federally illegal in the U.S., and there's no legislation on the horizon to suggest that will change anytime soon.
Since then, Canopy Growth has partnered with more U.S.-based companies, but its obsession isn't new. For years I've felt the company has been focusing too much on a market that isn't available and which may not be for a while.
NASDAQ: CGC
Key Data Points
Canopy Growth is desperate to cut costs
It's not the focus on the U.S. that shows Canopy Growth's desperation. It's the company's consistent cost-cutting efforts that display that. Earlier this year, the company announced that it would lay off 800 workers and even wind down its Smiths Falls facility in Ontario, where its headquarters is located.
In April 2022, it announced more than 240 job cuts. In 2021, it laid off staff as well and closed a facility in Niagara-on-the-Falls, Ontario. Canopy Growth has consistently incurred operating losses over the years even as it has scaled down its operations.
CGC Operating Income (Quarterly) data by YCharts
The company's latest round of cuts is steep, but investors shouldn't expect that will make the business profitable or that it will become a good investment.
Sales continue to decline
Another problem for the company is revenue. In its fourth-quarter results (for the period ending March 31), which Canopy Growth released last month, its net revenue totaled 87.5 million Canadian dollars, a 14% decline from the prior-year period. For the full fiscal year, revenue of CA$402.9 million was down even more, falling by 21%.
There's little hope of an improvement in the coming year, especially with Canopy Growth focusing more on cost-cutting initiatives and Canopy USA, an entity it plans to hold its U.S.-based cannabis investment in. Without strong economic conditions, it's hard to see the business' top line improving much in the near future.
Canopy has a new headache in BioSteel
As if Canopy Growth didn't have enough issues on its plate, it's now also dealing with a problem involving its BioSteel Sports Nutrition business. Canopy Growth's audit committee has found misstatements in previous financial statements to do with revenue recognition. It affected 2% of the company's net revenue in fiscal 2022. Canopy Growth made payments to minority shareholders based on those numbers, and it says it is "considering all legal options" in order to correct the issue. Meanwhile, it's also making management and personnel changes in BioSteel.
In fiscal 2023, which ended this past March, BioSteel generated CA$69.6 million in sales and accounted for 17% of Canopy Growth's top line. It was also the only business unit that generated double-digit growth -- sales doubled from the previous year.
Investors shouldn't take a chance on the pot stock
Canopy Growth has a lot of issues to work through before it makes for a tenable investment. It needs to find a way to grow while also bringing its costs down. It also needs to address the problems with BioSteel, given how important that business is to its operations. Canopy Growth is still not in good shape. My concern is that as long as it remains focused on the U.S. market, its attention will always be diverted, spending time and resources on a growth opportunity that it may not benefit from for years, if at all.
At a time like this, with its stock price in the gutter and the losses continuing to mount, it should be focusing on its core Canadian operations, nothing else. Until that happens and serious improvements to its financials take place, investors shouldn't buy this troubled pot stock.
