With talk of marijuana policy reform brewing in the U.S. and elsewhere, could it be time to buy shares of Canopy Growth (CGC -6.62%) in hopes of the stock experiencing a glorious comeback from its recent years of turmoil and falling share prices? And what about current shareholders -- is it time to sell, or could there be relief in sight?
Let's dive in and answer these questions by examining what the company has been up to during its difficult (and perhaps still ongoing) reformation period.
Chasing efficiencies and scaling down looks to be on the verge of paying off
The case for buying Canopy Growth is that it could be on the verge of marking a turnaround after a long period of shrinking and trying to become more efficient.
It no longer has a retail footprint in Canada, and many of its manufacturing and cultivation sites there are shuttered. It has also divested plenty of its assets, including entire brands. So, it won't need to pay excessive overhead to serve demand for cannabis that, at least in the swamped Canadian market, does not appear to exist. At the same time, after experiencing years of operating losses, it is now conceivable that it could start to report operating income, as its losses were only roughly $18 million in its fiscal third quarter.
That will be a much-needed change, but it won't be enough to make the stock worth buying on its own. Without its operations contributing cash, its reserves have dwindled, reaching $140.3 million in cash, equivalents, and short-term investments in the most recent quarter. At the same time, its long-term debt load, including capital lease obligations, is above $443 million.
It's true that Canopy reduced that debt burden by 66% over the last three years, which is a substantial change for the better. But that doesn't mean it is spring-loaded to grow.
Its quarterly revenue is down by 43.4% over the last 12 months, reaching $57.6 million, and it's still bringing in a lot less revenue than it was five years ago. There isn't any evidence that it has a competitive advantage in brand value or customer loyalty that would enable it to retain market share in the face of other players encroaching on its turf. It's debatable whether it even has a claim to any turf at all, given the steady contraction of its top line.
Hotly anticipated catalysts that might change its contracting top line, like cannabis legalization in the U.S., might not play out exactly as investors hope.
Even if Canopy manages to enter the U.S. market as it intends -- via a parallel business that it will own a non-controlling equity investment in -- it will face serious competition from domestic companies that have more resources, and fewer complicated governance schemes. Those competitors are likely to have more financial flexibility than Canopy, which does not bode well for its chances.
Holding it hasn't gone well so far
As you can see, the case for investing in Canopy Growth right now is not very strong, and mostly relies on the promise of better times ahead now that its extensive asset divestitures are complete and its debt load is reduced compared to before. Now let's discuss the case for holding or selling it.
Canopy's stock is down by more than 98% over the last five years. There is currently no sign that it will recover to anything approaching its former value, even if its biggest ambitions for the American market are realized. Anyone who bought its shares and held them for an appreciable amount of time has lost a significant portion of their money.
That doesn't mean the company can't pick up momentum and perform well over the coming years. Global demand for cannabis will probably be higher in the future than it is today. But as mentioned before, Canopy is not necessarily positioned to capture that demand and return the value to shareholders. And sentiment about the stock is clearly so persistently poor that even if it does start to mint better financial results, it might not matter.
So holding on to its shares and waiting for conditions to improve is not desirable. Selling them might help recoup some of your initial investment, and it will stop the bleeding.
The idea of missing out on big returns on the horizon should not dissuade investors from dumping their shares, either. There are other investments out there that can deliver the same promise, but without the baggage and excessive riskiness of Canopy Growth.
