- Canopy Growth (CGC) stock might tempt some bottom-fishers to scoop up shares in hopes of a turnaround.
- Look under the hood of the company, however, and you’ll see some major problems.
- Investors should avoid Canopy Growth as the share price is susceptible to further declines.
Based in Ontario, Canada, Canopy Growth (NASDAQ:CGC) stock is known for producing and selling cannabis and related products. CGC stock currently does not present a favorable risk-to-reward profile, and investors can choose to simply stay away from it now.
You may recall the excitement of October 2018. That’s when Canada’s Cannabis Act came into effect, providing regulation for the country’s medical and recreational cannabis markets.
The Canopy Growth share price was supposed to go to the moon after the passage of the Cannabis Act – right? Let’s see how that panned out, and consider the issues that led to a disappointing trade that might only get worse in 2022.
What’s Happening with CGC Stock?
The Cannabis Act went into effect on Oct. 17, 2018, and CGC stock traded fairly close to $40 at that time. Fast-forward to early April of 2022, and the stock is near $8.
Not to be the bearer of bad news, but the past year has been particularly brutal for Canopy Growth’s loyal investors. Shockingly, the share price sank from $32 to around $8 is just 12 months.
How could this have happened? First of all, we have to keep in mind that the markets are remarkably efficient nowadays. In all likelihood, investors front-ran the positive news of the Cannabis Act’s passage, baking it into the CGC stock price ahead of time.
Then, Canopy Growth and other canna-businesses had to live up to the hype, which was a tall order. Besides, some folks who chased cannabis-company stocks at high prices probably forgot (or didn’t know in the first place) that some of these businesses weren’t profitable.
At that time, they couldn’t have predicted the supply chain issues that would wreak havoc on commodity-based businesses in the 2020s. Yet, here we are and investors must consider how commodities, including cannabis, will continue to be negatively impacted by supply chain problems.
Even with those issues in mind, some folks may be tempted to buy CGC stock in hopes that the company will turn a profit soon. Does the data support this idea, though?
It’s difficult to predict the future, but we can certain examine the recent past for clues as to Canopy Growth’s financial trajectory.
The fact is, Canopy Growth hasn’t been a profitable company. In the third quarter of fiscal-year 2022, the company sustained a net earning loss of $115 million.
Could Canopy Growth’s top-line results offer some hope for the bulls? Not really, as the company’s Q3 FY2022 revenue declined 8% year-over-year.
Next, we can turn to the company’s gross margin, an important financial metric. As it turned out, Canopy Growth reported gross margin of 7% in Q3 FY2022. That’s a substantial decline from the 16% recorded in the year-earlier quarter.
What about Canopy Growth’s capital position, then? Is there any improvement in that area?
Sadly, the company is failing in that regard as well. In terms of free cash flow, Canopy Growth reported an outflow of $168 million in Q3 FY2022. This represents a 24% increase in outflow versus the year-ago period.
Finally, we should consider Canopy Growth’s cash and short-term investments. These amounted to $1.4 billion as of Dec. 31, 2021, and marked a decrease of $0.9 billion compared to March 31, 2021’s total.
What You Can Do Now
There’s no reason to hold out hope for Canopy Growth if the fiscal facts don’t justify optimism.
The CGC stock price appears to have been front-run in anticipation of windfall revenues and profits. After the hype phase came the disappointment, and some folks are left holding the bag.
Now is not the time to “be a hero” and invest in Canopy Growth. It’s best to stay on the sidelines and find other ways to build your portfolio this year.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.