Canopy Growth (TSX:WEED)(NYSE:CGC) stock price was already in the throes of despair before the coronavirus crisis. The stock had already fallen dramatically from late 2018/early 2019 highs as the cannabis bubble burst. In March, Canopy Growth stock price continued to underperform the TSX, lagging it by 5.7%.
During the month of March, all eyes were on developments related to the coronavirus. Societies have been attempting to lessen the human toll of this virus. They are doing this by taking measures that were unimaginable only a few months ago.
As the realities of social distancing and isolation became increasingly clear, the economic fallout also became crystal clear. Hence, the TSX fell sharply, just as all global markets did.
Canopy Growth stock price lags the TSX as its stores are deemed “non-essential” businesses in some provinces
Some provinces, most notably Ontario, have closed cannabis stores in March. While online orders can still be placed, this places a damper on the industry. But even this has been lacking clarity and predictability.
This decision was a reversal of a prior decision that listed cannabis stores as essential, so it’s has been a very fluid situation — and more uncertainty in an already uncertain environment.
Canopy Growth stock price lags the TSX as the risk outweighs the potential in investors’ minds
It goes without saying that the risk tolerance of investors has fallen dramatically lower in recent months. The coronavirus crisis gave the cannabis industry another push down the slippery slope.
But Canopy Growth supplies cannabis for the medical and recreational marijuana markets. As such, it may not be as risky as investors may be thinking, at least on the surface, as revenue and demand should prove to be highly resilient.
This spending should prove to be insensitive to the economy in much the same way as alcoholic beverages are. Also, the crisis may very well increase demand for CBD medicinal products. Health products such as CBD-based products have surely increased value in this environment.
Yet, logistical and regulatory problems are barriers to the functioning of this industry. We have seen the bubble bursting as cannabis companies dealt with many issues in this new industry.
From government missteps to company missteps and even fraud, cannabis stocks have been fraught with uncertainty and risk. Canopy Growth stock price has fallen 72.5% from its highs.
And the risk doesn’t end there. The company’s balance sheet is in bad shape as it continues to report big losses. Thus, it’s clear that the company is not in any state to withstand a crisis.
Foolish bottom line
On the bright side, demand for cannabis and cannabis products is theoretically quite inelastic, which means that economic troubles should not affect sales of these products. In fact, for many, cannabis products are as essential to them as traditional prescription medicine.
The medical marijuana market will whether this storm easily. The recreational marijuana market will likely see a boost in demand.
In summary, the reasons for the underperformance of Canopy Growth stock price seems quite simple. The outlook is proving to be more complicated, as competing forces are at work.