Nervous cannabis investors have been watching Canopy Growth Corp (NYSE:CGC) closely since the company’s founder and co-CEO was pushed out in July. Shares of CGC stock widened their 2019 loss to 12.7% on Tuesday after Corona beer brewer Constellation Brands Inc (NYSE:STZ) — which spent more than $4 billion on a majority stake in the Canadian cannabis producer — announced a record $54.8 million quarterly loss on that investment. And CGC told investors earlier this month that it will need another three to five years to become profitable.
Given the poor performance of CGC (especially since April), the gloomy profitability projections, and the challenges that cannabis stocks in general have faced, is this the time to invest in Canopy Growth stock? Or does CGC have further to fall before it bottoms out?
A Trying Year for Canopy Growth Investors
Investors who jumped on Canopy Growth stock in the lead-up to recreational marijuana legalization in Canada have had a rough ride since last fall.
Between ramp-up issues, distribution challenges and consumer demand that was much weaker than expected, recreational marijuana sales in Canada have been tepid since legalization. That has hit most cannabis stocks and CGC was no exception. Pot-stock exchange-traded fund ETFMG Alternative Harvest ETF (NYSEArca:MJ) is down almost 59% since Canada’s abolition. Canopy Growth stock is the fourth-largest holding, at 6.99%, of the fund’s 38 marijuana equities portfolio.
In its Q4 2019 earnings, CGC reported a $323.4 million CAN ($243.1 million) loss. In its most recent quarterly earnings, Canopy Growth saw significant revenue growth but still posted a whopping $1.28 billion CAN loss. Its CFO said it could be three to five years before the company is profitable.
That Q4 performance saw Constellation Brands apparently exert its influence to push out Canopy Growth founder and co-CEO Bruce Linton.
All of this drama and underperformance was murder on Canopy Growth stock. After recovering from the immediate post-legalization disappointment, CGC hit $52.03 in April but it has been all downhill since then.
Bottom Line for CGC
The past year has proved that investors need to have a tolerance for risk when it comes to cannabis stocks. And they also need to have patience. The legalization of recreational marijuana in Canada didn’t lead to the stampede to corner pot shops that some had expected and there have been challenges in ramping up production and distribution across the industry. As a result, companies like Canopy Growth that saw explosive growth in their stock last fall have seen those record prices quickly cool.
Since hitting an all-time high of $56.89 on October 15 — two days before recreational pot became legal in Canada — CGC stock has now lost nearly 56% of its value.
However, CGC stock investors should have seen the worst of things by now. Expenditures on production ramp-up that boosted operating costs should begin to ease up. The slow-to-start Canadian recreational marijuana market has begun to pick up, and in December cannabis edibles and beverages will become legal to sell in the country. The legal marijuana market is growing in the U.S. (it hit $11.9 billion in 2018) and globally is projected to be worth $66.3 billion by 2023.
Canopy Growth is the largest cannabis producer, at least by market cap (even after this year’s CGC stock slump), although Canada’s Aurora Cannabis (NYSE:ACB) has an edge in total production capacity. CGC has the strong backing of Constellation with its proven track record of marketing alcoholic beverages like Corona. When the company picks its new CEO, that should bring strong leadership. And Canopy Growth still has $1.82 billion CAN in cash.
It’s difficult to say whether CGC has hit its absolute bottom yet, but analysts remain bullish on the company’s prospects. Of 23 analysts polled by CNN Business, only one recommends selling, while 14 say now is the time to buy Canopy Growth stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
