Similar to peers in the cannabis industry, Canopy Growth (NYSE:CGC) stock has been on a sustained downtrend. In the last five months, Canopy Growth stock has declined by 55%. While the companies in the industry have been talking about a big global opportunity, the markets seem to be more connected with reality. Of course that sense of reality has come after the initial exuberance that sent cannabis stocks surging higher in 2018 and the early part of 2019.
I believe the recreational cannabis and medicinal cannabis industry will grow slower than expected. The markets are discounting this factor. In particular, I believe that global regulatory hurdles can impact growth in the medium term. So how exactly will CGC stock be affected if all of this comes true?
Why CGC Will Likely Face Regulatory Hurdles
Canopy Growth stock, among other players in the industry, are likely to face regulatory headwinds and it will impact its growth potential.
Consider a research article published in The Journal of Neuroscience, which found that “[a]lmost 35% of American 10th graders have reported using cannabis.” The study also found that even a small use of cannabis can change a teenager’s brain. On a standalone basis, the study might be inconclusive of the potential negative impact. But it does trigger need for further research. Importantly, if there is a clear negative implication, it will impact the prospects of wide legalization of recreational cannabis.
Similarly, according to the National Institute of Drug Abuse “Researchers haven’t conducted enough large-scale clinical trials that show that the benefits of the marijuana plant (as opposed to its cannabinoid ingredients) outweigh its risks in patients it’s meant to treat.”
Specific to CGC, the company has 1,000 patients participating in human health clinical trials. It is likely that in the coming years, research will translate into wider medicinal use. My only point is that it might be too optimistic to expect stellar growth in medicinal or recreational cannabis, especially for the time being.
There will be plenty of regulatory hurdles given the negative impact that few studies have already suggested.
Canopy Growth Is Moving in the Right Direction
Even with the given concerns, there is no doubt that the medicinal use of cannabis will gradually expand. Significant clinical trials that are underway will translate into expansion of medicinal product portfolios. Canopy Growth is leading the way with 110 patents, 290 patent applications and 1,000 patients participating in clinical trials.
In addition, the company’s inorganic growth has been aggressive and focused.
Just as an example the acquisition of C3 in May has helped Canopy Growth make inroads in Europe. C3 is a leading manufacturer of dronabinol, which is a registered drug in Germany, Austria, Switzerland and Denmark.
Similarly, the acquisition of BioSteel Sports Nutrition and This Works will allow Canopy Growth an entry in the sports nutrition, natural skincare and sleep solutions business.
Therefore, CGC is spreading its wings and it will deliver long-term results. However, in the medium term, cash burn will continue as research and development investments remain high. At the same time, marketing expenses will be high in the next three to five years.
Canopy Growth will be launching products that include vapes, edibles and beverages. In general, these will be high-margin products and can support improvement in CGC’s EBITDA margin. I would, however, be concerned about regulatory bans if these products do indicate negative medical evidences trending higher.
Final Thoughts on CGC Stock
Considering the concerns discussed above along with a supply glut of dried cannabis, CGC stock has been trending lower in the last five to six months. The medicinal use of cannabis will gradually expand and the same holds true for recreational cannabis.
However, Canopy Growth is unlikely to sustain stellar top-line growth. I believe that revenue growth from medicinal use of cannabis will be muted. At the same time, regulatory hurdles can be a headwind for recreational cannabis growth.
Amid these, CGC stock might not see big downside from its current levels, but the upside might be capped until the market reaches an inflection point. Therefore, investors should remain on the sidelines as the stock can potentially remain sideways to marginally lower for the time being.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.