In recent years, Canadian cannabis companies have struggled to achieve profitability. Ontario-based cannabis grower Canopy Growth (CGC -5.89%) is no exception.
Cannabis has been fully legal in Canada for several years. However, the market is saturated, with fierce competition, little growth and tight regulations. Canopy Growth reported a somewhat positive quarter despite these circumstances. Let's dig deeper to see if it makes this marijuana stock a good investment right now.
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The bull case for Canopy Growth
Canopy Growth's revenue increased 3% to 108.7 million Canadian dollars ($80.4 million) for the quarter, following a period of consistent revenue decline.
Canadian medical cannabis revenue increased to CA$14.4 million, up from CA$13.4 million in the previous year's quarter.
Its recreational revenue, on the other hand, fell 38% from the same quarter last year. Canopy launched a wide range of derivative products in 2021, which received positive feedback from customers. However, it appears that the market for these products (vapes, edibles, concentrates, topicals, and others) has also reached saturation.
Canopy has made every attempt in the last two years from shutting down underperforming facilities to reducing spending to save money and become profitable. Its cost-cutting initiative is proceeding as planned. According to management, the company cut CA$172 million in costs as of the end of the first quarter of fiscal 2024, ended June 30.
The bear case for Canopy Growth
Canopy's revenue increased this quarter, but not enough to generate profit. Canopy reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$57 million, compared to a loss of CA$78 million in the prior-year quarter.
The net loss was CA$42 million, compared to CA$2 billion in the comparable quarter a year ago, when it recorded significant asset impairment write offs. The company significantly reduced its net losses, which is a good sign -- but not good enough.
It's disappointing to see that the company that had a first-mover advantage in Canada is now struggling to generate more revenue.
Canopy's core cannabis business declined in the quarter. Canopy, like peer cannabis company Tilray Brands, realized that simply being a pure-play cannabis company would not suffice. As a result, it diversified, which appears to be working reasonably well.
The majority of the revenue growth in the first quarter can be attributed to its brands BioSteel (which manufactures sports hydration products), Storz & Bickel (which manufactures vaporizers), and This Works (which manufactures skin and wellness products). However, it will fail to see green in its bottom line unless revenue growth is consistent across all of its segments.
Data source: YCharts
Canopy ended the quarter with CA$571 in cash, cash equivalents, and short-term investments. However, it is also in debt to the tune of CA$1 billion. Management said that the company is working with secured and unsecured lenders to reduce debt by CA$437 million by the end of the third quarter of fiscal year 2024. Canopy also reported a CA$151 million negative free cash flow.
The bear case wins
Canopy Growth, like most Canadian cannabis companies, relies on the U.S. cannabis market to drive growth. Federal legalization, however, is a long shot. Domestic marijuana companies will benefit first if and when legalization occurs. Canopy is working with several U.S. partners to establish itself in the American market, but it is a waiting game.
Canopy's bear case outweighs its bull case. Most cannabis businesses aim for positive EBITDA. The company is working hard to turn all of the red flags green. Management reaffirmed the company's goal of having positive EBITDA in all business units (except BioSteel) by the end of fiscal 2024.
EBITDA, however, is not a true measure of profit. Canopy must generate consistent net income and free cash flow to pay down its debt. This battered cannabis stock remains a high-risk investment.
