Stick by CGC Stock Amidst the Volatility

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After a really strong start to the year, Canopy Growth (NYSE:CGC) stock has lost some steam. At one point in late January, CGC stock was up over 80% for 2019.

When The Global Cannabis Shake-out Comes, Will Tilray Still Be A Leader?Since then, though, Canopy stock has given back half of those gains, as CGC stock price is up just over 45% now. While a gain of over 45% for half a year’s work is nothing to sneeze at, investors seem to be taking their foot off the gas pedal of marijuana stocks in general.

The excitement and hype surrounding the cannabis space is still buzzing, but the market is shifting toward a wait-and-see approach. New announcements of partnerships and acquisitions are no longer enough to lift marijuana stocks for an extended period of time.

Investors now want to see real results from cannabis companies.

The Market Punished CGC Stock for Its Weaker Volumes

CGC stock tumbled  11% after it indicated that its kilograms of marijuana sold had declined quarter-over-quarter. Additionally, its profit margins narrowed, as its pricing was not as favorable.

For awhile, the market bought the idea that. with the additional capital it  had secured from its partner, Constellation Brands (STZ), Canopy Growth would take off like wildfire. CGC stock certainly has rallied tremendously, but some feel that Canopy stock has gotten ahead of the fundamentals.

Impatient for CGC to realize improved operating cash flows from all the new acquisitions, investors punished shares on Friday for its weaker-than-expected quarter.

The fact is that lumpy quarterly performances here and there are normal at this stage in the business cycle. CGC has made upfront investments, but the wait between making deals and realizing consistent revenue streams from them can be meaningful, especially in the consumer-product space.

While I admit that the widening operating loss surprised me, it is still too early to be as bearish as those who sold CGC stock on Friday appear to have become. The company’s adjusted EBITDA for the fiscal year amounted to a loss of $257 million compared to a loss of $36 million in the prior year. It costs money to make money, and this widening is largely due to major efforts on the sales and marketing fronts.

It’s certainly worth keeping an eye on the company’s EBITDA, but at this point, its top-line trends are more telling, as CGC is in the “invest in growth” phase. Annual net revenue growth is still strong,  as the company’s top line surged 191% year-over-year. Additionally, new revenue streams are beginning to contribute to the top line. Among these new streams are value-added products, extraction services, and clinical partners. Expect revenue from those sources to rise in the coming quarters.

Let’s not forget that CGC is very financially stable, with cash and cash equivalents of $4.5 billion.

New Strategic Sources of Revenue

To address the concerns about its narrowing margins, CGC has already begun diversifying into higher-margin cannabis products. The vape category is a high-growth one, though it does have some regulatory risk. Intellectual property that CGC is developing with Storz & Bickel, a medical devices company it acquired in the third quarter, could be a revenue driver.

As Storz & Bickel becomes fully integrated, its sales should continue to increase. Those sales should start making a real impact on CGC’s P&L in 2020.

The Bottom Line on CGC Stock

This feels like a normal bump in the road for Canopy Growth stock. In all likelihood, there will be more bumps ahead for CGC stock,  as it’s in the midst of  an expectations game. What’s certain is that for owners of CGC stock who are playing the long game, this recent move should not cause any lost sleep.

CGC continues to execute on its plan and still leads the space in terms of breadth of vision for CBD applications. These are still early innings for Canopy Growth stock, and it makes sense to hold onto CGc stock.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/stick-by-cgc-stock-amidst-the-volatility/.

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