As Oversupply Skyrockets, Canopy Growth Stock Has Further to Fall

Another week, same dismal trading in marijuana stocks. Things are looking even worse for Canopy Growth (NYSE:CGC). Canopy Growth stock is down nearly 40% since the end of April and is threatening to make new 2019 lows. As of this writing, it’s already down 5% this week. And they’re not alone.

As Oversupply Skyrockets, Canopy Growth Stock Has Further to Fall

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Traders opened Monday’s trading by dumping shares in the beleaguered marijuana sector. The Alternative Harvest ETF (NYSEARCA:MJ) dropped more than 2%, hitting its lowest level since the second week of January. It’s down nearly 30% since its springtime high.

What’s going on? Arguably, investor sentiment outstripped consumer demand for marijuana. While investors have rushed to get money into the marijuana sector in 2019, actual consumer demand for cannabis has fallen far short of production levels. Let’s take a look at both aspects of this imbalance.

Investor Interest and Canopy Growth Stock

Speculators have gotten increasingly excited about the marijuana sector in recent years. Canada’s full legalization of the drug last fall really changed a lot of perspectives. Many folks started viewing it as a legitimate industry and rushed to get in on the ground floor. Also, it’s no secret that alcohol and tobacco stocks have been two of the greatest performers over the years. Investors have made fortunes buying and holding vice shares. So why not marijuana?

This year, investor demand has played out through the rise of ETFs. Our Matt McCall noted the surge in new marijuana ETFs this year:

YOLO is actually a ticker symbol for a recent marijuana-related exchange-traded fund (ETF) called the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO), which debuted in April. As legalization spreads and the industry grows, cannabis ETFs are in the midst of their own marijuana craze. In just the last couple of weeks, three new funds have started trading or announced that they are about to: The Cannabis ETF (NYSEARCA:THCX), Amplify Seymour Cannabis ETF (NYSEARCA:CNBS), and Cambria Marijuana ETF (BATS:TOKE).

I must say, YOLO and TOKE win the best symbols award … at least for now.

I’d note that oftentimes when things get cute, sentiment is near its peak. When you start seeing products with goofy ticker symbols like TOKE and YOLO, it’s generally a sign that people are a bit too excited. The YOLO ETF, for example, is off to a rough start, down from $25 to under $20 since its recent launch.

Not Enough Consumer Demand

Canada’s health department has kept track of supply and demand data for the marijuana industry since legalization last fall. It publishes new data each month. The latest results, for May 2019, continue a most worrisome trend for the industry.

Last October, when legalization became law, Canada had roughly 115,000 kilograms of completed and in-progress dried cannabis inventory. In May, this jumped to 264,000 kilograms. From April to May alone, inventory levels surged by around 40,000 kilograms.

This is a disaster for Canadian marijuana producers because Canadian consumption is still under 10,000 kilograms a month. Thus, marijuana suppliers are producing roughly four times as much product as Canadians are actually buying. And there’s no sign of this inventory glut slowing down.

The supply of cannabis oil has similarly skyrocketed. It’s up by 150% since legalization to 128,000 liters of inventory. Consumption, however, is up by roughly just 50%/month and remains under 10,000 liters per month. Thus, there are more than two years of dried cannabis inventory and one year of CBD oil inventory available at current supply and demand levels. And supply growth continues to outstrip demand increases, making the excess even worse.

Canopy Keeps Growing, but Will Its Market?

Canopy itself has become a massive player. It’s on pace to have more than five million square feet of growing operations in Canada alone by the end of next year. And it may do much more overseas. In Colombia, for example, it has a license to cultivate up to 35 million square feet of cannabis. But who is going to consume this mountain of weed going forward?

Canopy’s growth at all costs strategy appears to be shaking key backers’ confidence. For example, Constellation Brands (NYSE:STZ), which owns a massive chunk of Canopy, is getting nervous. Constellation helped force founder and CEO Bruce Linton out of Canopy.

Rumors suggested that this was because Constellation was unhappy with Canopy’s financial performance, though Constellation denied this and claimed it instead wanted a different CEO to lead the company’s next phase of growth. In any case, the CGC stock price performance has surely not pleased Constellation’s leaders in recent months.

Canopy Growth Stock Verdict

A recent survey found that 44% of British Columbian residents are within C$200 of ending up broke at the end of every month. Given that Vancouver is a major marijuana market, this could be an issue. And it’s a worsening of recent trends as the economy has weakened amidst a slump in the housing market there.

Perhaps people don’t have enough money for discretionary purchases like marijuana. Or perhaps, as people say about alcohol, people will simply buy more because they are stressed out about the sour economy.

In any case, if you own Canopy Growth stock, you really have to hope something changes, and soon. Otherwise, there’s going to be a lot more stress ahead in the coming quarters. The company has committed to a massive growth program that is blowing through hundreds of millions of dollars.

Yes, the company is still well-funded from its Constellation partner. But Canopy is burning through that cash quickly and the share price will keep sinking with it unless the outlook for the marijuana market improves.

Based on the numbers in Canada, however, the situation is only getting worse. For now, Canopy Growth stock is likely to keep trending lower. If you want to buy Canopy Growth stock, wait, and you’ll be able to get it cheaper.

At the time of this writing, Ian Bezek held no position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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