Per the average estimate of Wall Street analysts, Canopy Growth (CGC 2.41%) stock isn't going to be a strong performer during the next 12 months, and it's forecast to lose 16% of its value. The Canadian marijuana cultivator is down almost 70% so far this year, so the gloomy outlook implies a continuation of tough times.
But it's worth noting that if the analysts are in the right ballpark, the stock's rate of decline will soon be much slower than it has been. That might mean that a true turnaround is just over the horizon. So is this a stock investors should be preparing to buy the dip with, or is it better to stay away?
What would need to happen for the dip to be a buying opportunity
For Canopy Growth to be worth buying on the anticipated dip over the next year, it would need to satisfy a few conditions. The first of those is consistent top-line growth.
Increasing revenue is a perennial issue for Canopy. Its quarterly sales of nearly $81 million are down 31% since the start of 2021. Due to an oversupply of legal recreational cannabis in Canada, producers during the last few years have been forced to slash prices to try to capture and maintain market share. The market is finally starting to show early signs of improvement, which may offer some relief for the company.
If its brands succeeded in drumming up some customer loyalty, the company may be well-positioned to bolster the top line if the market recovers more during the coming quarters. Cannabis legalization in the U.S. -- a remote possibility at the moment -- would also enable it to move forward with its planned strategic acquisitions there, and that would give its shares a major boost at the same time.
Another key condition for buying the dip is a dramatic improvement in its gross margin, which at 5% as of its fiscal first quarter ended June 30 is a major red flag. While that figure is improved compared to a year ago, when its gross margin was actually negative, it's still nowhere near a level that should encourage investors. Despite chasing cost efficiencies and shuttering various operations over the past year, creating savings of about $125 million annually, according to management, this company has a very long way to go before reaching profitability. Until the profitability issue is solved, top-line growth will just burn money faster.
The final condition for buying the dip is for the business to accomplish, or preferably exceed, what management states are its near-term goals. Specifically, management claims that all its continuing business units are anticipated to reach positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) before the end of its 2024 fiscal year, which corresponds to a calendar deadline at the end of March 2025. Its adjusted EBITDA for its 2023 fiscal year was a loss of $254 million.
For reference, on a non-adjusted basis, its EBITDA losses were in excess of $2 billion. Reaching a positive figure with the significant help of accounting adjustments is the bare minimum for investors considering a purchase. Even then, it will still be struggling financially, but at least its leadership team will have demonstrated the ability to move the business in the correct direction over time.
It's probably better to look elsewhere
Given the above, it is probably not worth buying the dip with Canopy Growth stock, assuming that its shares do what Wall Street is expecting. While it's facing the same set of headwinds as its competitors in North America, this company's high overhead costs and its lack of sales growth are simply prohibitive for an investment. Both of those factors could eventually change, assuming management can do what it's aiming to.
So even if you decide not to buy the stock, keep an eye on how Canopy's adjusted EBITDA shapes up during the next year. This will be a very risky purchase for the foreseeable future. But if there's steady progress on profitability, the chances of a full-blown turnaround will be much higher, and it might be worth reopening the question of buying the dip at that point.
