Cannabis stocks have been part of an extended bear market. Shares of most pot companies have been pummelled in the last 15 months. Marijuana heavyweight Canopy Growth (TSX:WEED)(NYSE:CGC) has lost over 70% in market value since September 2018.
Several pot stocks were trading at sky-high valuations after Canada legalized the use of recreational cannabis. While investors were worried about soaring valuations, this industry was severely impacted due to a range of structural issues.
As cannabis is a highly regulated industry, retail licenses are not given out easily. The slow rollout of retail stores in major Canadian provinces has resulted in lower than expected demand, driving inventory levels higher and profit margins lower for several pot stocks.
The COVID-19 pandemic has further dented the key financial metrics of these organizations. Many cannabis companies are running out of cash, and the current uncertain environment will make it difficult to raise debt or equity capital. So, are stocks like Canopy Growth an attractive buy right now after falling 70% from all-time highs?
Canopy Growth streamlines operations
On April 16, Canopy Growth announced operational changes aimed at optimizing production and align supply with demand. It plans to exit operations in South Africa and will transfer ownership of its African operations to a local business.
The company will also shut down its indoor facility in Saskatchewan to better align production in line with domestic demand. In Latin America, it will cease operations at its cultivation facility in Colombia and move to an asset-light model. Canopy Growth will also cease operations in its New York facility due to “an abundance” of hemp production in 2019.
In March 2020, Canopy Growth also announced 500 job cuts. These restructuring efforts are aimed at lowering the company’s cost structure and reducing cash burn.
Newly appointed CEO wants to optimize operations
CEO David Klein took over the reins as Canopy Growth’s CEO earlier this year. Klein was previously the CFO of Constellation Brands, a company that pumped in $4 billion into Canopy for a 38% stake back in 2018.
As a former CFO, Klein has trained his guns on optimizing the company’s cost structure. Canopy Growth will now primarily focus on Canadian operations that account for the majority of sales.
In the last three quarters, international sales accounted for 14.6% of total revenue. So, the above-mentioned exits will not have a significant impact on Canopy’s top-line.
What’s next for Canopy Growth investors?
Despite the 70% decline in valuation, however, Canopy Growth is still trading at a market cap of $7.65 billion, making it one of the largest players in the cannabis space. It is backed by Constellation Brands that continues to allocate resources to the cannabis giant.
The COVID-19 is expected to be a temporary headwind, and demand should pick up in the second half of 2020. The cannabis market is still in its nascent stage and is expected to grow at a fast clip in the upcoming decade.
The market opportunity in the edibles space, increase in retail stores, leadership position and expanding addressable market make Canopy Growth a solid pick for long-term investors.
