- Having shed more than 98 per cent of its value since 2019, Canopy Growth stock seems like a lost cause
- The company has posted losses of more than C$4 billion over the past five years because of limited growth in an oversaturated market
- While a turnaround story remains possible, Canopy’s demise should nudge investors toward smaller cannabis issuers that have established limited but more sustainable industry presences
- Canopy Growth stock (TSX:WEED) is down by 2.84 per cent trading at $0.855 per share
Having shed more than 98 per cent of its value since 2019, Canopy Growth stock seems like a lost cause.
Once the leader of the budding Canadian cannabis industry, the company’s focus on acquisitions and international expansion has fallen noticeably short because of a lack of sustained growth and only 23 states in the United States have legalized cannabis to date.
After the initial boom following Canadian legalization in 2018, Canopy and other key players have found themselves scrambling amid new market stagnation, increased competition, black market resilience and Canada’s strict prohibitions on media and package marketing. These factors, in conjunction with rising expenses because of inflation, have been catastrophic to Canopy’s bottom line, reducing its market cap from a high of C$25 billion to about $450 million today.
Canopy Growth’s losses pile up
Over its past five years of financial results, Canopy has lost $67.2 million, $736.2 million, $1.321 billion, $1.744 billion and $302.18 million, respectively.
During this time, the average price for a gram of cannabis fell from $11.78 in 2019, to $7.50 in 2021, to just under $5 per gram this month, according to research from Deloitte Canada, Hifyre, BDSA and Cannabis Benchmarks, exacerbating losses from industry-wide overproduction tied to initial rosy growth forecasts from the late 2010s.
Faced with margins plummeting back to reality, Canopy’s downward spiral has led to numerous fallout events substantiating deteriorating business quality and management’s inability to maintain a conservative balance sheet amid once unceasing hype. These include:
- S&P Dow Jones Indices’ removal of the company from the S&P/TSX Composite Index by June 19 because of market cap, price, and liquidity concerns. The exclusion means numerous ETFs and mutual funds that track the index will no longer offer price support for the stock, likely compounding its dire circumstances.
- S&P Global’s withdrawal of its rating for Canopy in late May. The rating stood at “selective default” in the long-term issuer category, meaning the company failed to pay one or more financial obligations. The company’s rating with Fitch stands at CCC- based on “materially diminished” financial ties with its main investor, Constellation Brands
- Voluntary applications for a management cease trade order after disclosing the need to refile several 2022 quarterly financial reports because of misstated sales from its BioSteel Sports Nutrition subsidiary, which is the subject of a growing number of lawsuits
Canopy adjusts its strategy
Though Canopy’s business has consistently worsened from declining market share, the company has remained laser-focused on instituting an asset-light model to reach its increasingly elusive goal of sustainable growth and profitability. Strategic changes have included:
- Additional premium-sector products, which come with higher price points and more loyal customers
- Laying off 800 workers or 35 per cent of its work force, resulting in the closing of its hallmark 1 Hershey facility
- Exiting the Canadian retail store space
- Revamped procurement strategies
- More flexible manufacturing
- Reduced third-party services
Despite these measures being directionally correct, they have been unable to generate brand power in a crowded North American cannabis market, suggesting that Canopy requires a clear macro tailwind to have a chance at recovering from its massive losses.
U.S. federal cannabis legalization, other hopes
This tailwind may materialize through U.S. federal cannabis legalization, allowing the company to realize the full potential of its partnerships with the likes of Acreage Holdings, Jetty Extracts and Wana Brands, among other U.S.-based cannabis businesses.
Alternatively, a high-profile investor with expertise in turnaround stories may swoop in, acquire the company for pennies on the dollar, and lay the foundation for a new and stable future for its popular brands, such as Tweed, Doja, Ace Valley, 7Acres, Twd and Martha Stewart CBD.
In the absence of any near-term catalysts toward these scenarios, the market’s pessimism surrounding Canopy Growth stock should not be viewed as an indication of price-value dislocation, but as an accurate assessment of risk with a high probability of total capital loss.
To end on a positive note for investors, the company’s fall from grace has provided a silver lining in the form of renewed interest in smaller cannabis companies, whose niche focuses, streamlined operations, and reasonable outlooks have allowed them to adapt to their industry’s evolution.
Click here for a list of candidates for potential due diligence.
Canopy Growth stock (TSX:WEED) is down by 2.84 per cent, trading at $0.855 per share.
The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.
