How Far Can Canopy Growth (TSE:WEED) Really Fall?

It’s been a rough year for high-growth cannabis stock Canopy Growth (TSX:WEED). The company’s stock price has lost more than half of its value since January highs and a lot of investors are currently deep in the red.

With new management and extensive plans in place for growth the real question is, when does the bleeding stop? At what point is Canopy Growth going to reverse this slide?

The road to profitability with Canopy Growth (TSE:WEED)

Canopy Growth, along with Constellation Brands help are trying to diversify and develop a portfolio of higher margin products to drive revenue. These are expected to include drinks, edibles, vape products, oils, skin creams and more.

The issue with this rapid expansion is often excessive expenditures and debt. Both institutional and retail investors are getting frustrated with Canopy’s inability to deliver. Over the last 4 quarters, Canopy has missed on bottom line expectations every time. Its most recent quarter was by far the worst, with the company posting a loss of $3.70 a share when earnings of $0.37 were expected. The company lost a whopping $1.28 billion in Q1, the largest loss ever recorded for a cannabis company in a single quarter.

The company is seeing extensive revenue growth. In fact, quarterly revenue growth sits at an astonishing 249%. However, at what point is Canopy expected to turn the corner and start generating profits? The markets have been punishing Canopy for its lack of forward progress in anything but revenue generation, and I would expect this to continue in the future.

Vaping bans could hamper higher margin sales

Public enemy number one in the vaping industry right now seems to be vaping oils infused with THC. Now, you could argue that the products that are making people sick (and even killing people) are black market products, but that doesn’t change the fact the United States government is coming down hard and fast on the industry.

The illness and the moves to ban flavored e-cigarettes damages the reputation of such products and the companies that produce them, and in the end could have a detrimental affect on the cannabis industry.

The road could be long, but there is potential at current price points

Canopy falling off a cliff in 2019 has presented potential investors with a fairly nice entry point if they are interested in the cannabis industry. Buying into Canopy Growth at its peaks in the high $60’s was essentially capital suicide, but at the $30 price level Canopy is more than likely going to start getting some looks again.

Market uncertainty hasn’t helped, as the TSX has taken a thumping over the last couple weeks. If there is one thing most investors don’t have time for in harsh market conditions, its high profile growth stocks that have yet to show profitability.

Canopy Growth is the best performing stock on the TSX over the last three years, and has built a solid portfolio of assets to succeed. The difficulty lies within management spending wisely and starting to produce better than expected results. 

Revenue growth right now, especially when compared year over year is a little misleading, as cannabis wasn’t legal until October 2018. Once we get into a full year of cannabis legalization, we will start to get a better picture of how fast these companies are truly growing revenue.

 

2 thoughts on “How Far Can Canopy Growth (TSE:WEED) Really Fall?”

  1. Hey Tom. Until these companies start posting legalization year over year growth, we’re really not going to get a clear picture of how they are growing.

    Consistent earnings misses, massive reduced guidances from HEXO, manipulation from Canntrust. The industry can’t seem to buy a break.

    These companies aren’t exactly young anymore, and most all of them aren’t even close to profitability. At $25 a share, Canopy is still trading at over 30 times sales and 32 times earnings. The company is also buried in debt, with a debt to equity ratio of nearly 40. Compare this to a high profile growth stock like Shopify, who is trading at 30 times sales, and has a D/E of 3.94.

    In my opinion, these companies have taken advantage of the fact they are reporting year over year revenue growth and comparing it to quarters where cannabis wasn’t even legal.

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