How the World’s Top Marijuana Stock Fell From Grace

After getting off to a good start in 2019, Canopy Growth Corp (TSX:WEED)(NYSE:CGC) has fallen from grace.

| More on:
Economic Turbulence

Image source: Getty Images

Canopy Growth (TSX:WEED)(NYSE:CGC) was once the world’s most beloved marijuana stock. After its $5 billion Constellation Brands deal, it went on a tear in the markets so pronounced, it lifted the rest of its sector with it. It’s hard to imagine now, but there was a time when many commentators believed Canopy was destined to soar to $100 and reach a market cap of $33 billion. In fact, it was at one point not far from hitting that milestone: its peak 2018 closing price was $73 and it had a market cap over $20 billion at that time.

That was then, this is now.

After the firing of its CEO and a $1.23 billion net loss, Canopy’s shares have been tanking hard. Down 14% for the full year and 51.9% from its peak price, WEED is about as bearish as they come. Although most marijuana stocks have been doing poorly this year, Canopy has been one of the worst. The following are three reasons why.

Ballooning expenses

It’s no secret that Canopy wasn’t profitable in its most recent quarter. In fact, with a $1.23 billion net loss, it was far from it. The lion’s share of Canopy’s enormous Q1 loss was warrant extinguishment, a one-time event that won’t recur. However, even the operating loss (which doesn’t include financing factors) was fairly large, coming in at $109 million.

A big reason for these losses is rising expenses. From Q2 to Q4, Canopy’s expenses grew from $234 million to $254 million, a sizable jump. However, those expenses fell to $200 million in Q1, so it’s possible that this long-term trend is starting to reverse.

Growth not matching competitors

The case for bullishness on marijuana stocks is based on one thing: growth. Almost none of these stocks are profitable, but most of them have revenue growth in spades. Canopy is no exception to this rule, having grown sales by 331% year over year in its most recent quarter. However, compared to ultra-high growers like Aphria, that’s not particularly great, especially when you consider that the company’s revenue growth will likely slow down as the one-time boost from legalization fades into the rear-view mirror.

Massive amounts of goodwill

A final factor that could be negatively affecting Canopy’s stock price is the goodwill on its books. Goodwill is generally defined as the premium a company pays for an acquisition above the target company’s book value. This “premium” can be kept on a company’s balance sheet as an asset, provided the asset is generating value for shareholders. However, accounting rules require that companies periodically “test” their goodwill to make sure it’s actually generating value for shareholders. If it’s not, then it may have to be written down.

As of its most recent quarter, Canopy had about $1.9 billion in goodwill on it books — the largest single category of assets it possessed. Should some of the company’s acquisitions prove to have been worthless, then much of that will have to be written down, drastically diminishing Canopy’s book value. If this comes to pass, then Canopy’s fall will likely continue.

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 Cannabis Stocks

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Why Canopy Growth Stock Could Double in 2024

Canopy Growth (TSX:WEED) stock saw its share more than double in the last two weeks. So, can it do it…

Read more »

Coworkers standing near a wall
Cannabis Stocks

Why Is Everyone Talking About Canopy Growth Stock?

Canopy Growth stock (TSX:WEED) saw shares surge in the last two weeks for a variety of reasons investors can dig…

Read more »

Pot stocks are a riskier investment
Stocks for Beginners

Why Shares of Cannabis Stocks Are Rising This Week

Cannabis stocks received a boost this week as the White House urged the drug enforcement administration to reschedule the drug.

Read more »

A person holds a small glass jar of marijuana.
Stocks for Beginners

Why Canopy Growth Stock Jumped 16% on Wednesday

Canopy Growth stock (TSX:WEED) is up 16% on Wednesday, adding to a surge of 60% growth in the last week…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Is the Worst Over for Canopy Growth Stock?

Down 99% from all-time highs Canopy Growth stock has burnt investor wealth and remains a high-risk investment.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Steer Clear: This Stock Spells Trouble

A newly listed cannabis stock is outperforming in 2024 but investors should stay clear to avoid trouble and losses.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

2 Best Marijuana Stocks to Buy This Month

Marijuana stocks in the U.S. such as Green Thumb and Curaleaf can help you deliver outsized gains to investors in…

Read more »