Many investors regard Canada-based Canopy Growth (NYSE:CGC) as synonymous with the growth of the legalized marijuana industry. The last few years, shareholders have gained considerable wealth investing in CGC stock early. But more recent ones have lost money as they placed their bets on the future of legal marijuana.

Since late April, Canopy Growth stock has been falling fast, leading to much disappointment. As the earnings season begins to get under way for many weed stocks, let us take a look at what may be next for CGC shares in the coming months.

How Canopy Growth Stock Makes Money

Since the legalization of marijuana in Canada, management has aimed for a set of broad goals: to become a powerhouse of production and sales in retail and medical marijuana, hemp-based products, edibles and cosmetics.

Further, CGC has been especially emphasizing that it is getting ready for the legalization of cannabis edibles in Canada. This paradigm shift is expected in a few months. And on paper, it strongly supports the case for Canopy stock.

The group has several facilities that grow and manufacture products for Canada as well as about a dozen other countries. Fiscal 2019 has seen Canopy Growth harvest more than double the amount produced a year earlier.

Canopy Growth stock has three key target markets:

• Canadian Consumer (i.e., retail recreational)
• Canadian Medical
• International Medical

In general, of these three areas, Canadian retail recreational is the most important one for the industry. Similarly, in the U.S., only about 20% of sales come from the medical side.

Sales to the Canadian recreational cannabis market generate most of the underlying revenue trajectory for Canopy Growth stock. And the company remains one of the leaders in the medical cannabis segment, too. Industry experts regard Canada’s second-largest cultivator, Aurora Cannabis (NYSE:ACB), as the leader in the medical cannabis segment.

In the long run, CGC’s investments in overseas markets are likely to give it a head start globally, too. However, the details about the worldwide operations are somewhat sketchy as they do not yet contribute to revenues very much.

Finally, Canopy has been acquiring licenses to produce hemp across the U.S., creating partnerships along the way to set themselves up for when marijuana is likely legalized at the federal level.

Disappointing Quarterly Results Hurt CGC Stock

So far in 2019, marijuana stocks have taken a dive on earnings misses. For example, after CGC reported earnings on June 21, the CGC stock price dropped 8% to below $40.

Analysts have been increasingly concerned that these companies somehow feel free to spend investor and partnership money. Essentially, these firms are increasing production and distribution in an agricultural commodity, i.e., marijuana. Plus, most of the consumption is limited to Canada.

In Canopy’s June report, analysts paid special attention to the sales figures and the level of operational loss. The results showed declining cannabis sales and plummeting gross margin. Hence, the dramatic loss in Canopy stock.

Moreover, their gross recreational cannabis sales of 68.9 million CAD were nearly 4% lower than a quarter ago.

In total, Canopy Growth’s revenue net of excise taxes came in at 94 million CAD. That’s 13% higher than last quarter and a 312% jump year-over-year. Revenue estimate had been 93.7 CAD million.

However, this revenue increase was actually due to non-cannabis sales. The main driver was the acquisition of Germany-based vaporizer maker Storz & Bickel. Without this ancillary revenue contribution, Canopy Growth’s quarterly revenue would have been 70 million CAD. That’s a 16% decline from the previous quarter.

Wall Street is now seriously questioning whether Canopy Growth stock and its peers can achieve much growth in revenue in this subdued Canadian cannabis market.

Considering Canopy’s expansion plans both in Canada and overseas, its bottom-line results could get a lot worse before they get better. Is CGC’s business model truly sustainable? Will management be able to achieve cost control and revenue maximization?

When they report again in September, shareholders are likely to scrutinize these metrics, looking for any signs of potential improvements. This will put CGC stock under considerable pressure.

Other Concerns About Canopy Growth Stock

Investors realize that the valuations in this new consumer market are extremely high. Additionally, sector players are burning through cash rapidly.

The group’s most recent net loss increased on the back of expanded investments. Q4 results showed a net loss of 323.4 million CAD, or 98 cents CAD per share. Last year’s comparable numbers were a net loss of 54.4 million CAD, or 31 cents CAD per share.

The group’s fiscal 2019 net loss has ballooned to 670 million CAD; it stood at C$54 million a year earlier.

Indeed many of these pot-based securities, including CGC stock, are not likely to achieve profitability in the near future. That suggests the industry has gotten ahead of themselves.

It is also important for investors to remember that marijuana is a capital-intensive crop. Producers like Canopy are effectively agricultural producers of a commodity vulnerable to traditional agricultural demand and supply issues.

Furthermore, Canopy and its peers must follow a host of Canadian regulations. Therefore, cannabis production requires significant infrastructure and regulatory costs. For example, earlier in July, Health Canada, the national regulator, has — due to “unauthorized activities” — revoked Agrima Botanicals’ producer and dealer licenses.

Similarly, Health Canada put on hold CannTrust’s (NYSE:CTST) for unlicensed growing. Therefore, non-compliance issues may haunt CGC stock and its peers.

Finally, earlier in July, Canopy Growth announced that its co-founder, CEO, and chairman Bruce Linton would be leaving the company effective immediately. Analysts rightfully assume that Constellation Brands (NYSE:STZ), which has already invested $4 billion into CGC stock and owns about 38% of the company, would exert more power in management.

The longer-term effects of this managerial change may indeed benefit the CGC stock price. In the shorter-term, it is bound to create more uncertainty.

Where is CGC Stock Price Now?

Year-to-date, Canopy Growth stock is up over 35%. Since late April, however, investors have been scratching their heads at the pace of the equity-value loss.

CGC stock is currently down from a 2019 high of $52.74 reached on April 29, to around $35. The downtrend since this spring is a stark reminder that CGC’s all-time high of $59.25 from October 2018 is now in the rear-view mirror.

If you’re an investor with paper profits, you may want to lock in some profits here.

Presently, the short-term technical charts, especially the trend lines and support and resistance levels, are telling investors to exercise caution. Expect nearer-term trading to be choppy at best.

At this point, bears are in control. Therefore, CGC stock will need a catalyst to make it attractive in the eyes of long-term investors. Indeed, they’re probably still skeptical about the nearer-term prospects for the company.

If you’re considering investing in Canopy Growth stock, you may want to start building a position between the $27 to $32 levels. Then, expect to hold the position for several years. In the meantime, expect a lot of volatility in the CGC stock price.

The Bottom Line on CGC Stock

There is still a lot of confusing hype surrounding the U.S. market potential for industry leaders like Canopy Growth. Investors may have to wait until the earnings reports of CGC’s peers are released in the coming weeks to have a better view on sector developments as they affect these marijuana stocks.

For Canopy Growth stock, it may be a long and choppy journey back to the all-time high of $59.25. Rich valuations in this commodity-based consumer market could take a hit in the coming months.

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