2019 is worth forgetting for investors exposed to the cannabis industry, and Canopy Growth (NYSE:CGC) stock is just one of the casualties. The stock has plunged by 72% from 2019 highs of $52.03 to $14.22 within seven months. Since then, CGC stock has subsequently bounced back by nearly 33% from oversold levels and currently trades at around $20.12.
However, I believe that the strong year-end rally is unlikely to sustain in 2020. I am of the opinion that Canopy Growth stock is likely to trade sideways in the New Year, and this column will discuss the factors that support my “neutral” outlook.
Expecting Muted Response for Product Launch in United States
Recently, Canopy Growth announced the launch of hemp-derived CBD product in the United States. The products will be marketed under the brand name of “First & Free.”
While expansion outside Canada is a positive, it’s too early to expect a meaningful impact on revenue and margins. The reasons are as follows —
- U.S. Food & Drug Administration has clearly stated that it cannot conclude if cannabis compounds are safe for humans. This will make consumers cautious before considering any cannabis product.
- The website for First & Free states for each product that the “Product is not intended to diagnose, treat, cure, or prevent any disease.” This will also reduce the consumer incentive to spend on products just classified as “dietary supplements.”
However, I am not entirely pessimistic for the long term. Canopy Growth already has 1,000 patients participating in clinical trials related to pain relief therapy, anxiety and sleep aid. In the coming years, evidence-backed medicinal products can spur growth. However, for the next 12-24 months, it is unlikely that medicinal cannabis market will gain traction.
Additionally, I am also positive on the long-term outlook for cannabis based beverages. The cannabis beverage market was valued at $173.8 million in 2018 and is expected to grow to $2 billion by 2026. CGC stock will have an early over advantage in this segment, along with companies like Aurora Cannabis (NYSE:ACB).
More Cash Burn in the Coming Years
For the first six months of 2020, Canopy Growth reported cash used in operations of 359 million CAD. This implies an annual cash used in operations of 720 million CAD. With Canopy Growth expecting positive adjusted EBITDA by fourth quarter 2022, cash burn is likely to sustain for another two to three years.
For the second quarter of 2020, CGC reported cash & equivalents of 2.7 billion CAD. The cash buffer will help in medium-term expenses related to sales, marketing and R&D. However, it’s entirely likely that Canopy Growth will pursue further equity dilution.
The company has a vision of global expansion, and as it penetrates new markets, the sales and marketing expenses will increase. This is likely to be a sustained concern for current investors. However, on the positive side, high margin, value-added products can help in limiting the cash burn.
With products like beverages, vapes and other edibles being launched, it will be clear in the next 12-18 months if EBITDA can turn positive sooner than expected. This makes 2020 critical for Canopy Growth.
David Klein, the new Chief Executive Officer who takes over Jan. 14, is another factor that will impact CGC stock direction in the coming year. Klein has strong financial orientation, and it’s likely that the focus will be on improving the profitability prospects.
While I am anticipating sideways movement, the above factors can change the outlook. Therefore, investors should remain in the “wait-and-watch” mode.
Final Thoughts on CGC Stock
Canopy Growth stock had a forgettable 2019 and challenges sustain for 2020. However, it is worth noting that the company is moving in the right direction.
Canopy’s focus on clinical research and evidence backed medicinal cannabis will trigger top-line growth in the long term.
With the launch of value-added products, it would be interesting to watch the financial developments in 2020. Positives related to margin expansion and cash burn decline can serve as a buy trigger. For now, though, it makes sense to remain on the sidelines after a 45% relief rally.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
