The majority of marijuana producers based out of Canada have burnt massive investor wealth in the last three years. Cannabis was legalized at the federal level in Canada towards the end of 2018, driving stocks in the sector towards record highs. However, due to several structural and macro-economic developments, Canadian cannabis companies, including Canopy Growth (NYSE: CGC), have failed to deliver on their lofty promises.
Shares of Canopy Growth are down 93% from all-time highs and have declined 85% in the last year, valuing the company at $1.53 billion by market cap. Since the start of 2019, Canopy Growth and its peers have been wrestling with multiple issues, including cannibalization from the illegal market, negative profit margins, slow rollout of retail store licenses, widening losses, high inventory levels, and much more.
Further, the ongoing pandemic coupled with rising interest rates and surging inflation will continue to negatively impact Canopy Growth in the future. Alternatively, due to the sell-off in CGC stock, its shares are trading at a much lower multiple. Let’s see if Canopy Growth stock should be part of your portfolio right now.
Canopy Growth disappoints investors with quarterly results
Last month, Canopy Growth announced its fiscal fourth quarter 2022 (ended in March) results and reported net revenue of CA$111.8 million, a decline of 25% compared to the year-ago period. Its net loss stood at CA$579 million or CA$1.46 per share. Analysts tracking the stock forecast Canopy Growth to report net revenue of CA$129 million and a loss of CA$0.31 per share in fiscal Q4.
The company missed revenue and earnings estimates by a wide margin dragging the stock lower by almost 14% post its results.
A few years back, Canopy Growth claimed it would report a positive EBITDA by the end of fiscal 2022 but now stated it aims to generate positive EBITDA by fiscal 2024. In the March quarter, Canopy reported a negative gross profit of CA$159.2 million, which increased investor concerns significantly. In the prior-year period, its gross margins stood at 14%.
Canopy Growth is a loss-making company grappling with negative sales growth. In the last three years, its total operating losses have surpassed CA$2.31 billion, and its massive cash burn is expected to continue going forward. In fact, analysts expect Canopy’s loss per share to narrow from CA$0.59 in fiscal 2022 to just CA$0.48 per share in fiscal 2024.
What next for CGC stock and investors?
Canopy ended fiscal 2022 with a cash balance of CA$1.38 billion, suggesting it will soon have to raise capital to support its cash burn. Every equity capital raise results in shareholder dilution — dragging the stock price lower. Further, Canopy Growth also has more than CA$1.6 billion in debt, which is less-than-ideal for a company reporting consistent losses.
During its Q4 earnings call, Canopy’s management emphasized the company maintained its pole position in Canada’s higher-margin premium flower segment. But these metrics don’t matter much if it does not help Canopy strengthen its balance sheet.
Investing in CGC stock carries significant risks given the company’s weak financials, million-dollar losses, and falling revenue.
Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.