To be fair, it sure feels like no cannabis stock is offering refuge of any sort these days, but Canopy Growth (NYSE:CGC) really drives home that point as the shares labor more than 52% below their 52-week high. Using the strict definition of a bear market — a decline of 20% from the most recent high — CGC stock is in a bear market 2.5 times over.
It has often been noted that cannabis stocks require some patience on investors’ part, but it has also been pointed out that Canopy stock is one of the names that tries investors’ patience. For awhile, analysts and investors were willing to sacrifice cannabis companies’ profitability for growth, but when Aphria (NYSE:APHA) recently turned a profit, regardless of the reason, the timetable for profitability in the cannabis space got moved up in a big way.
“Names who can show a route to profitability (or are there now) have the greatest likelihood attracting near-term investor interest,” Jefferies analyst Ryan Tomkins said in a note.
It’s clear that investors will only prioritize growth for so long. It’s becoming evident that profits, or at the very least, substantial revenue growth, are essential for cannabis companies to keep investors engaged.
Tick Tock …
Remembering that Canopy was the first well-known marijuana firm to ink a partnership with a big-name company, Constellation Brands (NYSE:STZ), and that it has a solid lineup of brands, such as Tweed, Spectrum Therapeutics, DNA Genetics, Doja and Maitri, makes the profitability all the more frustrating.
Some of Canopy stock’s woes are self-inflected. There has been upheaval in the C-suite and little clarity on when the company will stop losing money. By some estimates, CGC will not show earnings before interest, taxes, depreciation and amortization until a year from now. And even then, investors should rightfully nitpick because EBITDA is a non-GAAP metric. The forecast for when Canopy will be truly profitable is far longer.
“Finally, we are aligned with Constellation Brands in the expectation that our consolidated operations will begin to deliver positive net income in the medium term that is within three to five years,” Canopy CEO Mark Zekulin said on the company’s recent earnings conference call.
With Canopy stock trading at its lowest levels since January, the company can’t have execution missteps as it had in the second quarter. As Zekulin pointed out on the conference call, Canadian customers were craving high-THC products in the quarter, but Canopy didn’t have enough supply.
Bottom Line on CGC Stock
Execution problems can be rectified, but when it comes to Canopy stock, there is some pause about the company’s lack of execution in its home market of Canada, particularly as CGC has its eyes set on the lucrative U.S. market.
“Over the past two quarters, we have established offices in California and Colorado, and we’ll soon be establishing offices in Illinois and New York,” Zekulin said on the call. “We are currently involved in high-level discussions with key retailers in the United States, including being constructively involved with them as we collectively navigate the regulatory process. These investments in the U.S. CBD markets are significant.”
Canopy noted operational improvements in European markets including Germany, Poland, the Czech Republic and the United Kingdom.
If Canopy Growth can show some operational excellence in the U.S. and those European markets, it would go a long way toward allaying investors’ fears. Butt the bottom line is that revenue must increase and losses must decrease.
As of this article, Todd Shriber does not hold any of the aforementioned securities.