Investors in Canopy Growth (NYSE:CGC) stock and other legal marijuana companies have long focused on company financials: profitability, growth and margins. That’s usually the responsible way to valuing companies in any industry. But there’s one problem with that approach when it comes to marijuana: None of it matters.

That’s because even if it’s the strongest of them, Canopy Growth, will need U.S. federal legalization to survive. Without it, the marijuana company’s negative cash flow will eventually bankrupt it.

Investors need to stop focusing on company profitability (or rather, the lack of profits), and set their eyes on the far bigger prize for CGC stock: will Biden beat Trump in 2020 and legalize marijuana?

State-By-State Legalization Has Failed

As a growth-based investor, I’ve long eyed the legal marijuana industry. According to the Rand Corporation, a centrist think tank, Americans spend almost $70 billion on marijuana. Pretty close to the $94 billion spent on cigarettes.

But the timing has always been wrong.

Since 2018, broad-based marijuana exchange-traded funds have lost 75% of their value. Years of political and legal wrangling has left America with a patchwork of marijuana laws. Some create laughable confusion: it’s illegal to buy recreational marijuana in Washington, D.C. But thanks to Initiative 71, it’s technically acceptable to buy a keychain for $80 and receive a free marijuana “gift.”

Other restrictions, however, create deadly consequences. In 2019, illicit THC cartridges sickened at least 800 people and killed 12 when an illegal manufacturer accidentally added Vitamin E acetate to its mixture. The lack of national laws meant it took the Centers for Disease Control and Prevention months to track and identify the cause of the deaths, sending THC and tobacco vape demand into a freefall.

These patchwork laws mean that companies fail to reach profitability even in jurisdictions with legal marijuana.

CGC Stock Needs U.S. Legalization

Canopy Growth hasn’t escaped this harsh reality. Since its founding, the company has lost 4.3 billion CAD ($3.3 billion) of investor money. In fiscal 2020 alone, the firm burned through 1.4 billion CAD.

Why? The Canadian market just isn’t large enough for a significant player like Canopy Growth.

In 2019, Canadians spent just $5.9 billion on marijuana. That’s less than 10% of what Americans did; the billions that CGC has spent on product development and farming have mostly gone to waste. In 2020, CGC recorded a negative 8% gross margin after disposing excess hemp, oils and soft gel products.

Why Can’t Canopy Sell in the U.S.?

New York Stock Exchange (NYSE) laws still prohibit Canopy from expanding in America, even in states with legal marijuana.

“You can list here [in the US] if you’re not breaking any of the rules in any of the jurisdictions that you operate,” said Bruce Linton, former CEO of Canopy. “I don’t operate in any jurisdictions where it’s federally illegal, which unfortunately includes the U.S.”

These rules have forced Canopy to get creative. The company now owns a convertible stake in Acreage Holdings, a U.S. marijuana grower listed in Toronto. Its ownership will automatically kick in once the U.S. legalizes marijuana. In the meantime, however, CGC can’t touch a dime of its counterpart’s profits.

Will the U.S. Federally Legalize Marijuana?

Under Trump’s presidency, the U.S. government has pushed marijuana decision-making up to individual states. The most prominent marijuana bill under consideration, Strengthening the Tenth Amendment Through Entrusting States (STATES) Act of 2019, will only remove cannabis from the Controlled Substances Act.

But that isn’t full legalization.

Instead, the STATES Act will cede legislative authority to individual states. And unless a state fully legalizes marijuana, the drug will remain an entirely prohibited Schedule I narcotic.

That’s bad news for companies like Canopy Growth, which the law will still bar from entering the U.S. market.

Trump Will Unintentionally Kill Canopy Growth

Under the Republican president’s watch, there’s been little appetite for significant changes in marijuana laws. And the STATES Act essentially kicks the can further down the road, a move Donald Trump appears to wholeheartedly support.

That could spell the end for Canopy Growth. The company already has 477 million CAD long-term debt on its balance sheet, and an Altman-Z score (a measure of bankruptcy probability) of 2.23. That’s still higher than the “danger-zone” score of 1.8, but lower than a healthy 3.0 score.

Four more years of a Trump presidency, however, would push CGC over the edge. If nothing changes, Canopy Growth will lose 3 billion CAD or more over the next four years, entirely depleting its 1.9 billion CAD cash pile. With parent company Constellation Brands (NYSE:STZ) already impatient for profits, CGC will likely close its doors before the 2024 election comes around.

In other words, whether you’re a fan of the Republican president or not, a company like Canopy won’t survive under another four years of such losses.

Is Biden the Marijuana Industry’s Savior?

In a surprising twist, Biden may unwittingly save Canopy Growth. That’s because of a little-known bill known as the Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019.

Last July, Senator Kamala Harris (now the Vice-Presidential nominee), introduced the Democrat-championed bill that would essentially legalize marijuana on the federal level:

• Remove cannabis from the Controlled Substance Act
• Introduce a 5% federal tax on marijuana products
• Remove marijuana-related penalties and convictions

The MORE Act would act much like the 21st amendment that ended prohibition. Although federal laws won’t force local legalization (the reason why dry counties still exist), the Act lays clear groundwork for broad national recognition. That would essentially put Canopy Growth on the fast track to profits in the U.S. market.

There’s just one downside: the MORE Act will need a Democratic-controlled White House and Senate to pass. Republican Majority Leader Mitch McConnell opposes the bill, so the future of CGC stock rests on voters this November.

What’s CGC Stock Worth?

Investors looking for the best marijuana company should consider Canopy Growth. Its experienced management and focus on the lucrative marketing side (rather than low-margin cultivation) puts the company far ahead of companies like Aurora (NYSE:ACB) or Aphria (NASDAQ:APHA).

Yet, the company’s value hinges entirely on U.S. politics. A Trump presidency will likely send shares to $0, while a Biden presidency could make CGC the next $120 billion company.

So like it or not, Biden remains the best chance for legal marijuana companies to succeed. And as Canopy’s cash burn shows, the clock is ticking.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.