Canopy Growth (CGC 0.87%) was once the leading cannabis company in the world. While it's still one of the more popular companies in the marijuana industry today, it's hard to say it's a top one, given the company's struggles. Things have been going so badly for Canopy Growth that it has lost a remarkable 98% of its valuation over the past five years. Investing $100,000 in the business back in 2018 and holding on would have left you with less than $2,000 today.
But not all investors have given up on the company. Are they right to hold onto hope? Is there still a reason to remain bullish on this disaster of an investment, or are you better off simply avoiding Canopy Growth stock entirely?
Why some investors remain bullish on Canopy Growth
If you've followed Canopy Growth's story at all in recent years, then you know the big allure of this stock is that the company has the potential to be a big player in cannabis on the U.S. stage. But that comes with an asterisk because the U.S. pot market isn't fully open for business.
Although individual states permit marijuana use, at the federal level, it remains illegal. That means a Canadian-based company such as Canopy Growth can't transport marijuana products into the U.S. Even investing in U.S.-based businesses while staying on the Nasdaq appears unlikely. The exchange has pushed back on Canopy Growth's plans to consolidate revenue from interests it has in U.S.-based cannabis businesses, including Acreage Holdings and Wana Brands.
The bullish case is that if the federal government legalizes marijuana, the floodgates will open for Canopy Growth. The company has been waiting for that moment for years -- if it arrives, it will immediately be able to pull the trigger on pending acquisition deals it has in place (Acreage, Wana Brands, Jetty Extracts), and the business will take off. Sales will soar, and the company will finally have a path to profitability. And that, of course, will lead to a rising share price.
NASDAQ: CGC
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Why that isn't likely to happen
Federal marijuana legalization would be a huge step for the U.S., and Congress simply doesn't appear interested in taking it. Even limited efforts to provide companies in the industry that operate legally under state laws with access to normal financial services through the SAFE Banking Act have repeatedly failed to pass Congress. A larger, more comprehensive bill covering legalization would include policies on taxes, regulation, marketing, and a slew of other topics. Passing a simple bill in Congress can be difficult. Passing one as complex as marijuana legalization at a time when there are so many other pressing issues occupying Washington's attention is highly unlikely.
Even if it were to happen within the next few years, though, investors shouldn't assume Canopy Growth will be a big winner in the end. The company still is a cash-burning business. And to become a formidable player in the U.S. pot market, it would need to invest heavily in expanding its business south of the border. The problem is, it isn't in great financial shape.
As of June 30, the company had cash and cash equivalents totaling 533 million Canadian dollars ($384 million) on its books. And in its most recently reported fiscal quarter (ended June 30), it burned through CA$149 million. Those figures suggest that it will struggle to keep its operations afloat in Canada, let alone be able to build up the cash cushion it would require to take advantage of a big growth opportunity down the road.
Canopy Growth has regularly posted losses, and its net revenue rose by just 3% last quarter to a little less than CA$109 million. The company is getting rid of a money-losing business by exiting sports nutrition company BioSteel, but it still has a long way to go in proving it can get out of the red and generate positive cash flow. And until that happens, it won't be in strong shape to pursue growth opportunities, regardless of where they may be.
Investors shouldn't expect a miracle
Canopy Growth shares may rise in the future if the company can shrink its losses and improve its cash flow. But it's very unlikely that the company will get back to where it was five years ago. The company would effectively need to prove it can execute on its plan to enter the U.S. market. Unfortunately, legalization is by no means a guarantee, and even if it were to happen, Canopy Growth's weak financials would leave it in a poor position to take advantage of the opportunity.
Investors shouldn't expect a turnaround from Canopy Growth: despite its beaten-down valuation, the pot stock can still go lower. Given the mammoth risk facing the business, investors should avoid this stock.
