Canopy Growth Corp: The Bottom Isn’t In

edit Cannabis leaves of a plant on a dark background

Canopy Growth (TSX:WEED) stock has performed extremely badly since cannabis was legalized in October 2018. Almost from that exact date, the stock began a precipitous downfall that continues to this very day. So far this year, WEED stock has declined 59% in value, following several years of similar results. Since the stock hit its peak in October of 2018, it has declined 98% in price! At one point, the stock was well into “penny stock” territory, trading for as little as 50 cents.

Naturally, this got some investors smelling a bargain, as the stock had declined so much that it was beginning to look absurdly cheap. However, as you’ll soon see, Canopy’s valuation is nowhere near as “absurd” as it seems — and it may even be justified. For this reason, I think it’s possible that the bottom in WEED shares isn’t even in. I’ll spend the next few paragraphs explaining why I believe that to be the case.

Revenue declines

One big problem Canopy Growth is having right now is its long-term decline in revenue. Over the last five years, the company’s revenue has declined by about 1.05% per year. This is partially due to underperforming subsidiaries having been sold off, but the problem is the company’s earnings are declining even faster than its revenue is. In that same five-year period, the per-share loss grew from -$0.38 to -$2.45. Therefore, Canopy is having trouble with costs as well as revenue.

Why Canopy Growth is shrinking

There are three main reasons why Canopy Growth Corp is a shrinking business:

  1. Money from the Constellation Brands deal is running out.
  2. Cannabis is a commodity.
  3. Cannabis still faces pressure from the black market.

A few months before legalization hit, Canopy Growth got a $5 billion investment from Constellation Brands. The cash infusion was supposed to be used on growth spending, but as the section above demonstrates, Canopy has shrunk rather than grown. In other words, the cash from STZ is running out, and Canopy has little to show for it.

Second, cannabis is a commodity. Canadian cannabis consumers don’t have very high brand loyalty. Despite the efforts to market different cannabis “strains,” most consumers see them as interchangeable. On top of that, the black market for cannabis still exists and is even thriving in some areas. So, Canopy faces a lot of competition, not just from other cannabis companies but from old-school street dealers as well.

Hope for a better future?

Despite all of the negative things I wrote above, there are some reasons to be optimistic toward Canopy Growth stock. For one thing, all other cannabis companies are in the same boat of declining revenue and large losses. If this situation continues, eventually, some of them will go bankrupt, and the ones left standing will face less competition. The result should be more pricing power and better margins. There’s reason to hope for the sector as a whole, but who knows whether Canopy itself will be the stock to own in a future, more concentrated cannabis industry. Personally, I’m sitting this round out.

The post Canopy Growth Corp: The Bottom Isn’t In appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.