Canopy Growth (CGC 2.41%) is one of the leading cannabis companies in Canada. But unfortunately, that doesn't mean much these days given the industry's struggles. In a saturated market, many companies fight for market share, making it difficult for larger players to dominate. As a result, the company has set its sights on the U.S. market, but growth there remains off-limits for now.
Entering 2024, Canopy Growth still faces the same old problems of not being able to generate strong growth while trying to improve upon its cash burn. It recently made a move that should improve the latter, but not the former. Here's why Canopy Growth's stock may remain in a tough spot next year.
Selling off BioSteel fixes one problem but creates another one
On Dec. 1, Canopy Growth announced that it had completed the sale of BioSteel, which makes nutritional sports products. The company has said that the move "advances" Canopy Growth's efforts to become more efficient as it transitions to an "asset-light operating model." Getting rid of BioSteel will supposedly improve the company's cash flow. Canopy Growth has previously stated that it was a cash-burning business and that by not funding it, it has strengthened its financial position.
However, investors should be careful not to overlook the potentially bigger issue this creates: Canopy Growth has lost a huge source of growth. When the company reported its numbers for fiscal year 2023, which ended on March 31, only BioSteel was generating any significant growth. Revenue of just under 70 million Canadian dollars was double what the segment generated a year earlier. And outside of the Canadian medical cannabis business, which grew by just 6%, all other areas of Canopy Growth's operations were down on a year-over-year basis.
BioSteel was a big part of the company's growth. While management may want to spin selling it as a positive to say that the cash flow will improve, this is by no means a win for Canopy Growth.
The company's growth rate has been in free fall
The effect of losing BioSteel is already evident in Canopy Growth's most recent results, which the company released on Nov. 9. Revenue for the entire business (which no longer included BioSteel) was just under CA$70 million for the period ending Sept. 30, down 21% year over year. Across the board, Canopy Growth has struggled to find ways to grow. And when the company's fastest-growing unit is its medical cannabis business, that's not a good sign. Medical marijuana is a smaller opportunity than the retail cannabis market, which caters to a wider customer base.
Generating consistent growth is not a new problem for the company. Heading into 2024, without BioSteel giving its top line a boost, there's simply no reason to expect that things will get any better anytime soon.
CGC Revenue (Quarterly YoY Growth) data by YCharts.
Canopy Growth's stock can fall further in 2024
As Canopy Growth's business gets smaller, there may be less of a reason for investors to pay a higher price for the stock. With a less diversified business heading into 2024 and cash flow still being a problem (the company reported negative free cash flow of CA$67 million last quarter), it's hard to suggest that Canopy Growth's stock will be a good buy. Many investors may remain optimistic that the U.S. government will legalize marijuana and that such a move by the government will lead to a significant growth opportunity for the company. But there is simply little reason to expect that will happen anytime soon, if at all.
Although the cannabis company's valuation has taken a beating in recent years, Canopy Growth stock still isn't worth taking a chance on right now.
