In general, I would still prefer to stay away from marijuana stocks, even after their big declines in 2019. However, if I had to buy a cannabis stock at gunpoint, it would be Canopy Growth Corporation (NYSE:CGC). I believe that CGC is making the right business moves and is well-positioned to grow in the long-term.
That does not necessarily imply that Canopy Growth stock will trend higher in the foreseeable future. Positive cash flow is still a few years away for CGC, and Canopy Growth stock still seems expensive. I also expect its top-line growth to moderate after its initial growth spurt.
The single most important reason to believe that CGC’s growth will moderate is “growing concern about critical gaps in knowledge (of cannabis),” according to The Harvard Gazette. As a result, there is an urgent need to develop research-based evidence on the positive and negative impact of cannabis.
Consequently, more clinical trials are likely needed before cannabis can be more widely used for medicinal purposes. Keith Humphreys, PhD, a professor of psychiatry and behavioral sciences at Stanford’s medical school commented, “We don’t think cannabis is killing people, but we don’t think its saving people.”
Canopy Growth Is Focused on Clinical Trials
Instead of making claims that cannabis can be a game-changer in the medicinal industry, CGC is focused on gathering evidence of its medical effectiveness. That is a good strategy that should help CGC grow in the long-term.
Canopy Growth has 1,000 patients participating in clinical trials. Its clinical trials testing cannabis’ effectiveness in treating a wide spectrum of diseases and symptoms will extend into 2021. In addition,CGC has 90 patents and 230 patent applications.
Canopy Growth’s acquisitions have also helped it grow its medicinal cannabis business. The company’s acquisition of C3, Europe’s largest cannabinoid-based pharmaceuticals manufacturer, was significant.
In 2018, C3’s first medicinal product that utilizes cannabidiol as a mono-active ingredient was approved by the U.S. Food and Drug Administration. The product is used to treat particularly severe, treatment-resistant forms of epilepsy.
CGC’s acquisition of Beckley Canopy Therapeutics will help strengthen the cannabis company’s research efforts. Beckley’s website states, “Our products will be validated in medical trials and approved to make health claims.”
According to Canopy Growth’s CEO, “The acquisition of Beckley Canopy will allow (CGC’s U.K. subsidiary) to continue expanding its medical cannabis leadership around the world, strengthening our foothold in the UK and more broadly across Europe.”
As CGC’s medicinal products are launched, they will be backed by evidence, resulting in wider acceptance by doctors, governments, and consumers.
CGC Will Continue Burning Cash
For the first quarter of fiscal 2020, Canopy Growth reported an operating loss of $123 million. In Q1, it lost $31 million. Therefore, its loss widened even as its revenue growth has been stellar. Further, it used $158 million of cash in Q1, versus $67 million a year earlier. That indicates that CGC is burning cash at an annualized rate of $600 million to $700 million.
But CGC has cash and marketable securities of nearly $3.1 billion, so it can continue operating for a long time. But since CGC probably won’t have positive cash flow in the next two or three years. CGC stock is sinking.
Newly Legal Cannabis Products Can Improve CGC’s Margins
Edible and liquid cannabis products are slated to be sold in Canada for the first time legally next month . These products will likely generate higher margins than dried cannabis or cannabis oils.
So with CGC launching products such as non-alcoholic beverages and sports nutrition products, its margins could steadily improve.
Of course, there will be competition in this segment. Aurora Cannabis (NYSE:ACB) is also launching recreational products, including concentrates and edibles. However, if the market gains traction, there should be enough demand to support multiple players.
But there are potential regulatory headwinds. A Harvard psychobiologist recently warned that cannabis interferes with learning and memory. If such claims are validated, they will negatively impact marijuana stocks. Again, the key point is that more evidence-based research is needed to fill the “knowledge gaps.”
Concluding Thoughts on CGC Stock
CGC stock has slumped about 60% from its 52-week high. The correction was not surprising, as the valuation of all marijuana stocks had become excessive.
But with the company focusing on clinical trials and evidence -based medicinal developments, its long-term business outlook is positive.
However, given the risks facing Canopy Growth stock and the sector, investors should remain on the sidelines on CGC for now.
But once clinical trials bear fruit and more formulations are approved by the FDA, Canopy Growth stock can trend higher.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.