Should You Consider Buying Canopy Growth (TSX:WEED) at These Levels?

Amid the challenging environment, Canopy Growth provides an excellent buying opportunity, given its strong balance sheet and a viable business model.

| More on:
Cannabis stocks have fallen.

The last 18 months have been tough for the cannabis sector. The structural issues, such as weak demand, higher production, robust black market, and slow rollout of retail stores in Canada, have lowered the cannabis sales, causing higher operating losses and cash burn.

Meanwhile, Canopy Growth (TSX:WEED)(NYSE:CGC), with a strong balance sheet and a viable business model, is well equipped to ride out this crisis. Let’s look at its performance in the recently completed first quarter.

Strong first-quarter performance

Canopy Growth outperformed analysts’ expectations in its first quarter. Its revenue came in at $110.4 million, representing 22% growth on a year-over-year basis. Higher medical cannabis sales in both Canada and international markets drove the company’s revenue. However, the decline in recreational cannabis sales amid the temporary closure of retail outlets due to the pandemic offset some of the sales growth.

Its adjusted EBITDA losses declined marginally from $93 million to $92 million. Lower SG&A (selling, general, and administrative) expenses and decline in share-based compensation led to an improvement in its adjusted EBITDA. More importantly, the company’s cash burn declined by over 50% to $181 million. Meanwhile, the company had cash and cash equivalents of $2 billion at the end of the quarter. So, the company’s liquidity position looks healthy.

Outlook

Although the cannabis sector is going through a challenging period, the outlook looks brighter. Last month, BDSA projected global cannabis sales to grow by 38% in 2020 to reach $19.7 billion, despite the pandemic’s impact. Further, the market research firm estimates the cannabis sales to reach $47.2 billion by 2025 at a CAGR of 22%.

Meanwhile, Canopy Growth is well positioned to capture a higher market share in the growing cannabis market. It has recently re-positioned its value products with higher and more consistent THC ranges to meet the customers’ needs. It is also working on enhancing its quality and has launched several research initiatives.

Further, the company looks to expand its Cannabis 2.0 offerings, including cannabis-infused beverages, chocolates, and vapes. It has currently introduced four beverages and has plans to introduce two more later this year.

In the United States, Canopy Growth has increased its digital presence by launching an e-commerce site, where you can buy any of its 25 SKUs. Further, it has expanded the distribution of its vaporizer and non-CBD beverage products to key markets. Recently, the company announced it will introduce THC-infused beverages by summer 2021 in association with Acreage Holdings. So, the company’s sales outlook looks healthy.

Improving margins

Although the company’s EBITDA improved during the first quarter, it is still in negative territory, which is a cause of concern. Meanwhile, the company has been focusing on reducing its expenses.

It has slashed 18% of its workforce since the beginning of this year. Further, it has closed several production facilities to align its production with the existing demand. So, along with these cost-cutting initiatives, the growth in higher-margin Cannabis 2.0 products could help the company become profitable.

Bottom line

Canopy Growth has lost over 30% of its stock value this year. The weakness in the cannabis sector has dragged the company’s stock down. However, its long-term growth potential remains intact. So, if you have a time frame of three to five years, I believe Canopy Growth would be an excellent buy.

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 Rajiv Nanjapla 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 »