What Canopy Growth Stock Needs to Rally

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Canopy Growth (NYSE:CGC) stock is still falling. It’s now dropped almost 60% just since the beginning of May. Currently near $22, Canopy Growth in fact trades at an 18-month low.

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The decline can’t be attributed to just one factor. For instance, cannabis stocks on the whole have plunged, in part due to a slower-than-expected rollout in Canada. But CGC has underperformed all of its larger peers.

Disappointing earnings have played a role. A quarter-over-quarter decline in cannabis revenue hurt CGC in the fiscal fourth quarter. Fiscal Q1 results missed revenue expectations on the top line — and looked weak in terms of margins.

There are strategic concerns as well. Constellation Brands’ (NYSE:STZ) $4 billion investment gave Canopy the firepower to enter any market and develop any product. But with oversupply concerns rising, the value of production assets is declining. And Canopy’s broad reach looks less like a positive and more like a lack of focus on the most profitable aspects of the industry.

That said, the Canopy story isn’t over. In fact, it’s just beginning. And there is a path for CGC stock to rebound.

The issue at the moment is that such a rebound will take some external help as well. And given that multiple factors have led to the stock’s nearly 60% decline, it will take several catalysts to build Canopy Growth stock back up. I’m not ready — or close to ready — to jump in here. But here’s what investors should be looking for if they’re willing to take the proverbial plunge.

Sector Sentiment Can Boost Canopy Growth Stock

One of the odd aspects of cannabis stocks at the moment is that at least some investors and analysts suddenly have decided that profitability is important. It’s remains unclear why that shift has occurred.

After all, the long-term opportunity in cannabis might well be in the trillions of dollars in terms of revenue. The goal now is — and should be — to position for that opportunity.

Even from a fundamental standpoint, delayed profits don’t change the case all that much. A dollar of earnings in 2026 or 2036 isn’t worth much less now than one generated a year earlier. And yet profitability clearly has become a priority for investors, with one analyst specifically calling out Canopy’s near-term losses in stepping to the sidelines.

To be sure, the focus on profitability isn’t the only reason for the decline in Canopy Growth stock, as well as other pot plays. Expectations may well have been too high earlier this year. But Canopy is likely to stay unprofitable longer than a company like Aphria (NYSE:APHA), who is guiding for near-term positive EBITDA. CGC needs sentiment in the sector to return to revenue and scale and away from margins and profitability.

One problem is that it’s not clear when, or if, that will happen. If oversupply concerns have changed the narrative for good, revenue at any cost isn’t a good thing. From a near-term standpoint, similar profitability questions clearly have hit growth stocks elsewhere in the market, among them Shopify (NYSE:SHOP) and Roku (NASDAQ:ROKU).

The pressure on CGC stock thus may be coming from not just sector investors, but the broader market as well. Canopy will need external help to reverse that pressure.

Management Needs to Fix the Story

But Canopy also can help its own cause by giving investors something to focus on besides profitability. That well could be simply a “story” to tell investors.

After all, most cannabis plays do have simple, straight investment theses. Hexo (NYSE:HEXO), for instance, is the “branded ‘ingredients for food'” play. Cronos (NASDAQ:CRON) has made very clear that it will focus on cannabis derivatives, not production. The same is true of Tilray (NASDAQ:TLRY).

What’s the story for Canopy? Right now, it’s a little bit of everything. CGC stock is the one with the billions of dollars to spend — on everything. There isn’t a clear roadmap to that spending yet. The company has a deal with Acreage Holdings (OTCMKTS:ACGRF) to enter the U.S. market. It just made a CBD acquisition. It’s producing cannabis. It’s launching vaping products. The company is in the medical industry. And it’s trying to be the leader in Canadian recreational marijuana.

The underperformance of CGC stock may well be coming from investor concern toward that lack of focus. Like a restaurant operator with a big menu, it’s simply difficult to do that many things well.

The Case for CGC Stock

New management may help in terms of both developing strategy and communicating it to investors. It may also help in terms of execution — which hasn’t been great in recent quarters.

Admittedly, the slow pace of regulation by Health Canada hasn’t helped. But Canopy already has had to walk back profitability guidance for reasons that go beyond the opening of retail shops in the country. Gross margins need to improve, even accounting for the recent impact of underutilized capacity.

From a broad standpoint, early this year Canopy’s story was enough. It had the biggest cash hoard in the industry thanks to its Constellation investment. It was perhaps the simplest play on the worldwide growth in cannabis.

That’s no longer the case. Optimism toward the sector is fading. Canopy’s “everything for everyone” strategy isn’t exciting investors. And execution hasn’t been good enough.

Once all that changes, CGC stock can bounce. But it’s going to take quite a bit of time — and some outside help as well.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/cgc-stock-canopy-growth-stock-rally/.

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