Catalysts vs. Headwinds for Canopy Growth Corp.: Which Will Triumph?

Investors looking for growth have been well-rewarded by buying into the Canadian marijuana “green rush” early on. Shares of Canada’s largest cannabis firms such as Canopy Growth Corp.  (TSX:WEED) have remained some of the best performers over the past 12 months. While Canopy’s share price has dropped more than 55% from its peak late last year, investors who’d bought shares one year ago have still realized a 12-month return of 150% — not too bad at all.

Canopy shares have generally followed the sentiment of investors since the equities began trading on the TSX, driven higher by a number of catalysts, such as political legislation and legalization announcements, export agreements with other countries, branding initiatives, celebrity endorsements, acquisitions, and other growth-related activities which have added value to Canopy’s market capitalization.

As the first cannabis company to hit the “unicorn” $1 billion market capitalization milestone, Canopy has for some time been considered the front runner to become the market leader in the Canadian cannabis industry. Recently, however, it has become apparent that other large and seemingly formidable competitors have come on to the scene, ready to disrupt what may have been a “party of one”; some investors believed early on that Canopy would simply grow too quickly for other small cannabis companies to catch up, essentially mopping up the market before it became fully legalized — a scenario that has not happened according to plan.

Instead, Canopy remains one of a few large Canadian cannabis producers competing for market share of a market that has not yet been fully defined in terms of size and growth. Headwinds that appear to have stopped the company’s ever-increasing market capitalization in its tracks include increasing uncertainty related to the timing of legalization, whether or not the Canadian government will be able to overcome obstacles related to a number of treaties that Canada will find itself in violation of when marijuana does become legal, and how large Canopy’s market share will end up being at the point of legislation.

Bottom line

The rise, dip, and plateau Canopy has seen is not unique to Canopy alone, but have represented widespread investor sentiment across the broader marijuana industry. Canopy will, however, likely represent a more volatile stock over the medium to long term, in my opinion, as investors continue to determine if the premium associated with Canopy’s heavily focused growth model justifies waiting for cash flows that may or may not come, given the current situation Canopy finds itself in as being one of the worst performers among its peers in terms of profitability.

Right now, it appears the headwinds that are holding down Canopy’s shares are likely to continue to provide downward pressure, and I would wait for significant share price depreciation before considering this stock as an investment.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned.

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