Canopy Growth (CGC +3.36%) is one of the biggest names in the cannabis industry. For years, the company has been at the forefront of the legalization movement in Canada. And it also is looking to be a key player in the U.S. pot market in the future. The company has struggled to generate significant growth of late but it's bullish on its long-term prospects. Where could the company be 10 years from now, and is it worth investing in the business for the long haul?
NASDAQ: CGC
Key Data Points
The bullish case for Canopy Growth
Within the next decade, there's the possibility that the U.S. legalizes marijuana and the cannabis market opens up for business. That would be the ideal situation for Canopy Growth because it would allow the company to enter the largest cannabis market in the world. By 2030 alone, the U.S. cannabis market could be worth more than $40 billion, according to a recent estimate from Grand View Research, which projects the industry will grow at a compound annual rate of 14.2% between now and then.
Canopy Growth has been preparing for the opportunity for years; in 2019, the company made plans to acquire multi-state operator Acreage Holdings once it became permissible to do so. That day hasn't arrived yet but the company is still looking to consolidate the U.S. businesses it has interests in through Canopy USA, a special purpose vehicle.
In 10 years, Canopy Growth and the multiple U.S. brands it hopes to consolidate, including Wana Brands and Jetty Extracts, along with other companies it could acquire by that time, could be battling it out for market share in the U.S. alongside Curaleaf Holdings and Green Thumb Industries. That would accelerate its growth rate and likely win back many investors.
Scaling its business might also be a way for Canopy Growth to achieve profitability. Amid all that growth it may still be in the red, but there may at least be a realistic path to breakeven at that point.
The bearish case for Canopy Growth
Investors who get caught up in the hype surrounding Canopy Growth's long-term prospects in the U.S. often forget that legalization isn't a sure thing, not even in 10 years. And even if it does happen, there could be a whole lot more competition by then, which would make achieving significant growth no easy feat for the company.
The bigger problem, however, is that Canopy Growth may not survive, at least not in its current form, over the next decade. As of the end of last year, the company had just 186.2 million Canadian dollars ($124 million) on its books in cash and short-term investments. At the same time, it also had long-term debt of CA$520.7 million. And during the nine months ended Dec. 31, it burned through CA$206 million in its day-to-day operations (which is excluding its discontinued operations).
The company simply can't afford to keep going at this rate. That's why it has been selling businesses and moving to an asset-light model in recent years. Alcoholic beverage maker Constellation Brands invested $4 billion in Canopy Growth in 2018 and that hefty cash balance allowed it to not worry about cash burn or a lack of profitability. But that's not going to be the case in the future.
Under more challenging economic conditions for the business, Canopy Growth is yet to prove its operations are sustainable, which is why it's possible that within the next 10 years the business gets acquired by another company or it simply winds down its operations because it runs out of resources. While an acquisition may sound like good news for investors, it likely would come at a big discount to where the stock trades today because it wouldn't be under ideal circumstances.
Canopy Growth still has a lot to prove
There are huge growth opportunities out there should the U.S. legalize cannabis and the market opens up one day. But even if that does happen, a cannabis company needs to have its house in order and be in good financial shape to take advantage of those opportunities.
Canopy Growth isn't there yet, and it's not even close. The company faces some huge challenges ahead, and its troubling cash position is at the top of those concerns. Without a viable business model that can generate positive cash flow, there may be a lot of share offerings and dilution in the company's future.
This is not a safe stock to own and Canopy Growth is not a surefire way to profit from the industry's long-term growth. I'm not optimistic about the company's future during the next 10 years, or that it'll even be around by then. Growth investors are better off looking at stocks with stronger financials and that are not nearly as risky as Canopy Growth.
