Is It Time to Sell Canopy Growth Corp (TSX:WEED) Stock?

Canopy Growth Corp (TSX:WEED)(NYSE:CGC) has been the darling of the cannabis industry for years. Are its best days behind it?

| More on:
Man making notes on graphs and charts

Image source: Getty Images.

The past month has not been kind to Canopy Growth Corp (TSX:WEED)(NYSE:CGC). After losing 36% of its value in the month after legalization, the company posted disappointing Q2 earnings, cementing a lacklustre fall season. After all the hype surrounding this company in the lead up to legalization, it’s hard not to see the past month as a “canary in the coal mine” foreshadowing bad things to come.

Nevertheless, Canopy is still a growing enterprise and a dominant player in the cannabis industry both by market cap and revenue. Is it really best for Canopy investors to cut their losses when this company seems to have so much ahead of it? First we need to look at Canopy’s Q2 results to see what they really mean.

Disappointing earnings

There were two main disappointments in Canopy’s Q2 earnings report: one, revenue growth slowed to 33%; and two, the company’s net loss grew to $330 million. That second figure was particularly shocking to many people, as the company earned just $23 million in revenue in the same period. While the company was seeing its revenue growth slow by almost a half, it increased its spending dramatically.

Canopy’s mounting costs are often justified as being investments in future growth. The idea is that the company is aggressively investing in infrastructure that will make it the world’s #1 cannabis producer–or at least #1 in 11 countries. Sure, in the short term, building new grow sites and supply chains worldwide is going to run up some costs. But eventually all the grow sites will be built and paid for, and from that point on Canopy will practically be printing money… Right?

Well, not exactly.

The problem is that Canopy’s Q2 results show that the company’s investments aren’t kicking revenue growth into high gear. 33% growth would be good for most companies, but not if expenses are up several hundred percent across the board. And that’s exactly what we saw in Canopy’s Q2 report.

If you look at the expenses breakdown, you can see that costs are up exponentially in every segment of the business, not just investments. For example, share-based compensation costs are up 800%. This is not the mark of a company that’s turning its spending into profit.

The silver lining

On the whole, Canopy’s recent performance has been disappointing.

But there may be a silver lining.

Canopy’s Q2 earnings covered a period ended September 30. This means that only a few early pre-orders of legal cannabis were factored into the report–a tiny fraction of the company’s total sales. In Q3, we’ll be seeing a report that factors in a full three months of legal cannabis sales, and its results may be better.

In fact, it’s possible that these Q3 results could even justify what happened in Q2. Maybe all those ballooning costs in Q2 were really just in preparation for a big earnings blowout we’re about to see in Q3, which will silence naysayers like me once and for all. Maybe.

For now, though, I think most investors would be better off avoiding Canopy Growth Corp.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

More on Investing

Shopping and e-commerce
Tech Stocks

Can Shopify Recover to New All-time Highs in 2022?

With more than 1.7 million merchants on its platform, Shopify (TSX:SHOP)(NYSE:SHOP) is undoubtedly a core platform for SMBs. The company’s software-as-a-service platform …

Read more »

calculate and analyze stock
Dividend Stocks

2 Top TSX Stocks to Put on Your TFSA Buy List

TFSA investors are searching for undervalued TSX stocks to buy that have the potential to deliver big gains in 2022. …

Read more »

Payday ringed on a calendar
Dividend Stocks

Get Unbelievable Monthly Income With High-Yield Dividend Stocks

The only thing better than a dividend stock is a stock that pays dividends every month. For people who live …

Read more »

gas station, convenience store, gas pumps
Dividend Stocks

1 Key Catalyst Investors in Couche-Tard Stock Need to Watch

One of the top value stocks on the TSX, Alimentation Couche-Tard (TSX:ATD) has been a strong performer over the past year. …

Read more »

Value for money
Dividend Stocks

2 Top Value Stocks I’m Looking to Buy Right Now

Value investing is a lot more than just grabbing stocks that look inexpensive. The shares of an organization in permanent …

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Tech Stocks

The 5 Best High-Growth TSX Stocks to Buy on the Dip

The broader market selling, primarily in high-growth stocks, provides a solid opportunity for investors to buy future winners at lower …

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

RRSP Investors: 2 Top Canadian Dividend Stocks to Buy for Total Returns

Canadian savers are searching for good TSX stocks to buy inside their self-directed RRSP that pay reliable dividends and can …

Read more »

Stand out from the crowd

Why Solana Could Be the Cryptocurrency to Own in 2022

One of the best performers in 2021 in the cryptocurrency world, Solana (CRYTO:SOL) has inspired a tremendous amount of interest from retail …

Read more »