Canopy Growth (CGC -5.98%) shed nearly 9% of its value on Thursday. The largest cannabis stock by market capitalization fell after Oppenheimer analyst Rupesh Parikh warned that investors should brace for large losses in the coming years.
Parikh expects Canopy Growth to generate losses of more than $500 million over the two-year period ending March 2021, suggesting that profitability may be much further away than many investors are hoping.
Canopy Growth is a popular stock among cannabis investors due in part to the company's large cash reserves. Canopy's balance sheet strength is a result of Constellation Brands' (STZ 1.78%) (STZ.B 0.00%) $4 billion investment, which gave the beer giant a nearly 40% stake in the marijuana producer.
Yet Constellation's cash infusion is being whittled down by Canopy's operating losses. Canopy generated negative operating cash flow of 158 million Canadian dollars and negative free cash flow of CA$372 million in its most recent quarter. The cannabis company has battled both supply shortages in some markets and oversupply issues in others. This, in turn, has led to revenue shortfalls and declining margins.
These issues have also led to upheaval in Canopy's executive ranks. Co-founder and co-CEO Bruce Linton was ousted in July due in part to Constellation Brands' frustration with Canopy's mounting losses. The company is still in the process of identifying a new CEO.
Despite Canopy Growth's uncertain leadership situation and unclear path toward profitability, Parikh says the company's stock is still richly priced at seven times his revenue estimate for 2021. For these reasons, the analyst recommends that investors should hold off buying shares until the stock's valuation improves, though he declined to offer a target price. "We would await a full reset before speculating on [Canopy Growth's] prospects," Parikh said.