Time flies on the stock market. It now seems so long ago that people rushed to invest in cannabis stocks following positive regulatory developments, especially in Canada. Unfortunately, the industry hasn't lived up to the hype. Even perceived market leaders like Canopy Growth (CGC 2.41%) have failed to deliver anything resembling positive returns.
Canopy does remain one of the leaders in the Canadian cannabis market, so if things improve, the pot grower could be one of the big winners. Let's find out how badly Canopy Growth has performed in the past five years by calculating how much a $5,000 investment in the stock in 2019 would be worth today. Then, we'll determine whether it can perform better from here on out.
CGC Total Return Level data by YCharts
"Disappointing" doesn't begin to describe it
Let's start with a (very) short rundown of what has transpired for Canopy Growth during the past five years. The company quickly emerged as a leader in the Canadian cannabis market for several reasons, one of which was an investment from Constellation Brands, a company that produces alcoholic beverages.
Teaming up with Constellation Brands would give Canopy Growth access to significant funds to expand its operations without diluting shareholders, or so the argument went. Constellation Brands's expertise in navigating a highly regulated industry would also come in handy. And the possibility for the two to create cannabis-infused beverages seemed exciting.
Canopy Growth would benefit from Constellation Brands's existing distribution channels. Despite these advantages, Canopy Growth has been a flop. The company fell prey to the same issues that plagued other pot growers in Canada. The country had a complicated process for issuing cannabis retail licenses, significantly slowing things down. As former Chief Executive Officer Mark Zekulin once said:
The market opportunity today is simply not living up to expectations and that this risk of oversimplifying the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing.
Zekulin said that in late 2019, this issue had long-lasting effects on the market north of the border. That's to say nothing of the competing illegal market, the legal problems in the U.S., and the fact that the opportunity seemed so attractive that too many companies tried to pounce, creating oversupply issues. Canopy Growth shares recorded a negative compound annual growth rate (CAGR) of 62.28% in the past five years.
That would have turned an initial capital of $5,000 into $38.18 -- good enough for a few cups of coffee. Investors would have been better off investing in an exchange-traded fund that tracks the S&P 500. The index's CAGR of 14.65% in this period would have turned $5,000 into $9,904.68.
A tough road ahead for Canopy Growth
Canopy Growth's plan to turn things around includes at least two parts. First, the company decided to get its operations in order by aggressively cutting expenses while moving closer to profitability. Second, the cannabis leader devised an elaborate plan to dominate the U.S. market once the country legalizes pot at the federal level. In fairness, the first part of this strategy is making headway.
In its latest reporting period -- the third quarter of its fiscal year 2024, ended Dec. 31 -- Canopy Growth's gross margin and adjusted gross margin increased by 30% and 27% year over year, respectively, with both metrics coming in at 36%. Canopy's net loss worsened slightly -- by 2% compared to the previous year's quarter -- to 230.3 million Canadian dollars ($170 million). However, its negative CA$9 million in adjusted earnings before interests, taxes, depreciation, and amortization (EBITDA) jumped by 82% year over year.
Canopy's negative free cash flow of CA$33.9 million was also 57% better than the year-ago period. This was all despite its net revenue decreasing by 7% year over year to CA$78.5 million. There is some improvement, but that's not nearly enough to make the company attractive. And that's before we consider Canopy's hopeful strategy to move into the U.S. market if legalization happens at the federal level. Canopy struck a deal to acquire Acreage Holdings, a New York-based pot company, provided the regulatory pendulum swings that way.
Canopy made several other moves to take advantage of the opportunities in the U.S. But when will the country legalize adult uses of cannabis at the federal level? That's anyone's guess. It could be in one year or 10. Until then, it will be a waiting game for this strategy to pan out entirely.
Even if the U.S. does legalize marijuana, as we learned from the Canadian experience, nothing guarantees that Canopy Growth will be successful. Don't expect this cannabis stock to provide much better returns in the next five years than it did since 2019. It's best to stay far away from Canopy Growth for now.
