Canopy Growth was at the forefront of the cannabis industry just a few years ago. But the Canadian cannabis producer has faced significant struggles that have reduced its valuation from billions to millions, as revenues have declined and losses have piled up.
In 2018, Canopy stock pushed past $50 per share, but investors have gradually given up on the stock since then. In an astonishing fall from grace, it dropped nearly 99% from that high-water mark to where the stock currently trades near $0.50. Indeed, the share price is down from a 52-week high of $4.77 and recent earnings reports have only continued to reinforce the negative trend.
A major reason for the selloff is Canopy Growth stock has declined so dramatically is because of the highly competitive cannabis market in Canada, and the lack of opportunities to expand. The company was able to achieve its initial growth through aggressive acquisitions, but those opportunities have dried up.
Canopy was banking on expansion into the US, but Federal cannabis legalization in America isn’t going to happen anytime soon. That has forced the company to lay off employees, sell its stores, and consolidate its production and distribution facilities in an attempt to restructure its business model. Some analysts believe that restructuring will only delay the inevitable but is there light on the horizon?
Canopy Growth: How It Started
Canopy Growth began as Tweed Marijuana, Inc. in 2013. From there, the company grew to include over 2000 employees and was considered one of the foremost cannabis companies in the world. But financial woes have reduced its market capitalization from multi-billions to just north of C$350 million, where it currently stands.
In 2018, recreational marijuana was legalized in Canada, and the first legal cannabis sale happened at a Tweed store. The future looked bright for the company, as shortly after that Canopy Growth completed its historic IPO and became the first licensed and regulated cannabis company in North America.
Canopy began an aggressive strategy to dominate the cannabis industry by acquiring multiple cannabis brands. It has made 18 acquisitions in total, with the most recent being the 2021 purchases of Wana Brands, Ace Valley, and Supreme Pharma.
Soup To Nuts Business Model Enticed Early Investors
Canopy Growth owns several farms and facilities for the production and distribution of cannabis, but it also sells cannabis-related products. The company does business in five segments:
- Canadian cannabis,
- International cannabis,
- Storz & Bickel, and
- This Works.
The German-based Storz & Bickel brand, which was acquired by Canopy in 2018, manufactures and sells a variety of portable and desktop vaporizers. The company plans to launch new models in 2024 and intends to build market share in the US.
This Works is a line of skincare and natural beauty products that was acquired by the company in 2019. This product line accounts for the smallest percentage of the company’s revenues and has faced declining sales.
The BioSteel line of sports nutrition products has been one of the most lucrative lines for the company over the past year. This London-based brand was brought into the Canopy Growth fold in 2019, and since then Canopy has introduced CBD into some BioSteel products and increased the brand’s traction in the US.
But Canadian and International cannabis is still Canopy Growth’s bread and butter. The Canadian market includes both medical and recreational cannabis sales, and the company has been able to increase revenues in both segments even in tough times. Nevertheless, international cannabis still offers the most opportunity for revenue growth.
Recent Financial Performance Woes Weighed Heavily
The company’s first quarter of 2023 earnings report was delayed for an internal review of the BioSteel product line revenues. Unfortunately, after the review Canopy had to amend revenues for 2022, meaning that BioSteel’s annual revenues were actually 10% less than initially reported.
The major positive from the first quarter was that Selling, General, and Administrative (SG&A) expenses and Cost of Goods Sold (COGS) are both expected to be reduced by a combined C$125 million over 2023. And the debt-reduction measures Canopy Growth put in place are expected to reduce total debt by C$500 million over the next year.
But revenue decreased by 21% year-over-year to C$403 million. That was due to a tightening Canadian market and disappointing revenues from the BioSteel brand. And the company suffered a net loss of C$648 million, a 10% increase from C$589 million in the same quarter of 2022.
Analysts’ Ratings for Canopy Growth
Despite disappointing earnings news, analysts are still divided on the stock. Of 10 analysts, the most bullish forecast predicts CGC shares will top $6 over the next 12 months, which would be over a 1,000% gain. But that’s the only buy recommendation for CGC.
4 analysts believe that the stock is a hold and expect CGC to go as high as $0.88 over the next 52 weeks, which would still be over a 60% gain. But the other 5 analysts see the stock as a sell, with the most bearish forecast predicting the stock will drop as low as $0.32 over the next 12 months.
Will Canopy Growth Stock Bounce Back?
Canopy Growth is a Canadian cannabis company that had heavy support from investors and appeared to be poised to take the lead in the cannabis industry. But strong competition and no opportunity for US expansion has caused to stock to drastically plummet.
There isn’t a lot of good news about CGC, and that makes it difficult to believe that the company will be able to turn it around. Marijuana legislation in the US is at a standstill and there isn’t likely to be widespread legalization over the next few years. That may be too long to wait for a company that’s burning through cash.
Because of the very low stock price, many investors might be tempted to take a chance on a company that was once viewed as the leader in an emerging space. But it’s hard to believe that Canopy Growth will recover any time soon. While there’s still a chance Canopy could get your portfolio high, the odds of it going up in smoke make it one to avoid for most.