Canopy Growth (CGC -2.33%) has lost more than 95% of its value in just the past three years. To say that the Canadian cannabis stock has struggled would be a huge understatement. But investors also should be careful not to assume that simply because it has declined so much that it can't go lower. Here are a few reasons the pot stock could still sink further.
Constellation Brands looks to be pulling away
A notable development that investors shouldn't overlook this month is news that alcoholic-beverage maker Constellation Brands has allowed its warrants in Canopy Growth expire. The company could have taken a larger stake in the cannabis producer but opted not to; the warrants represented 16.9% of Canopy Growth's common stock outstanding.
Constellation Brands invested $4 billion in Canopy Growth back in 2018, when it was more optimistic about the state of the cannabis industry. Today, however, with Canopy Growth often dragging down Constellation's earnings numbers, it looks to be distancing itself from the struggling pot producer. What may be even more concerning for Canopy Growth investors is that Constellation also states that it "has no other present plans or future intentions that relate to Canopy."
That's not something you want to hear, given Canopy Growth's underwhelming financials, and it could add to the already high risk the stock poses right now.
Canopy's bottom line is improving, but its growth rate isn't
Last week, Canopy Growth reported its second-quarter earnings numbers for fiscal 2024. The positive is that the company has been aggressive in slashing costs as it pursues an "asset-light" operating model. But while that model may be more cost effective, it isn't great news for growth investors.
For the period ended Sept. 30, Canopy Growth's net sales totaled 69.6 million Canadian dollars ($50.8 million), representing a year-over-year decline of 21%. That's not going to sit well with investors who were bullish on the company's growth opportunities. Earlier this year, the company said it was going to stop funding BioSteel, its nutritional business, as it has been burning lots of cash. But BioSteel was also a key part of Canopy Growth's long-term growth strategy.
While the company anticipates it will be able to post positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of the current fiscal year, without a strong growth catalyst to drive a significant improvement in its top line, that may not be enough to win over investors.
A reverse split looks inevitable
Another problem for the pot stock is that it trades nowhere near the $1 per share necessary to stay on the Nasdaq exchange. Unless there's some excitement in the cannabis industry that lifts the stock higher, investors should brace for the reality of a reverse stock split sometime next year.
A reverse stock split doesn't impact a shareholder's position in a company -- they simply own fewer shares at a higher price -- but often, stocks fall after a reverse split, because it's a reminder that a stock hasn't been doing well. And that can give bearish investors some additional fuel and reason to sell the stock.
This year, shares of Canopy Growth have fallen by 75% and trade for a little more than $0.50.
The stock looks even riskier than it has in the past
Canopy Growth's growth rate is falling, it's still unprofitable, and it doesn't appear as though it can rely on Constellation Brands for a big cash infusion should its operations deteriorate even further. When combining all those factors, the stock may be as bad a buy as it has ever been.
The one glimmer Canopy investors seems to cling to is the hope of marijuana legalization in the U.S. But what if that day never comes, or it arrives too late and Canopy Growth's days as a cannabis producer are over?
Those are the uncomfortable questions Canopy Growth investors should consider, because despite its efforts to cut costs, the company still faces an uphill battle in the highly competitive Canadian cannabis industry. Despite its beaten-down valuation, Canopy Growth's stock can still go lower, given the risks it still faces today.