Canadian cannabis investors have experienced a wild and volatile ride in the past few years. First, investors were optimistic about marijuana legalization in Canada back in October 2018. Shares of pot producers were then trading near record highs, as market participants expected marijuana demand to explode.
Shares of Canopy Growth (TSX:WEED)(NYSE:CGC) soared from $2.44 a share in April 2016 to $70 in April 2019, a stellar rise of 2,800% in three years. However, soon after, investors realized that marijuana demand in Canada was impacted due to the slow rollout of retail stores in major provinces as well as a thriving black market.
Further, as is the case with several other nascent and high-growth industries, companies need to brace for a wave of competition that will impact top-line growth. The oversupply in the cannabis market resulted in high inventory levels, less-than-impressive revenue growth, million-dollar write-downs, and heavy losses.
Canopy Growth stock fell to a multi-year low of $15 in March 2020. While it has since recovered to trade at its current price of $40.2, let’s take a look to see if the pot heavyweight remains a solid bet right now for long-term investors.
Canopy Growth is backed by Constellation Brands
One clear advantage that Canopy Growth has over peers is the investment by U.S. beverage giant Constellation Brands. In October 2017, Constellation Brands invested $245 million in Canopy for a 9.9% stake. A year later, it invested another $5 billion in Canopy and, at the end of 2020, had a 38.6% stake in the latter.
In the December quarter, Canopy reported an EBITDA loss of $68 million compared with a loss of $97 million in the prior-year period. Canopy Growth can “afford” to remain unprofitable in the near term, as it ended CY 2020 with $825 million in cash, compared to its cash balance of $1.3 billion at the end of fiscal 2020.
It shows us that Canopy is burning $77.4 million each month on its operating and investing activities. So, the company has 11 months before which it will have to raise additional capital. Canopy Growth also has close to $800 million in short-term investments that can be sold to improve its liquidity position.
Earlier this year, Canopy Growth also filed a shelf prospectus allowing it to raise $2.5 billion over the next 25 months. It’s quite possible that the cannabis behemoth is keeping dry powder aside to aggressively expand south of the border once marijuana is legalized at the federal level.
Q3 sales were up 23% year over year
In the third quarter of fiscal 2021 that ended in December, Canopy’s net sales were up 23% year over year at $153 million. The company accounts for 15.7% of Canada’s recreational cannabis market and investors will be hoping for this figure to improve over the next few quarters.
In the next two years, Canopy Growth expects sales to increase at an annual rate of 40%, which will allow its earnings to expand and eventually turn profitable.
The investment of Constellation Brands positions Canopy Growth to gain a strong foothold in the cannabis-infused beverage market that might reach $2.8 billion by 2025.
While Canopy enjoys a leadership position in Canada’s marijuana market, it needs to narrow its losses and race to profitability to keep long-term investors interested. Cannabis legalization in the U.S. will take time but it will also be a massive driver for Canopy’s top-line growth.
Are you a fan of cannabis stocks line Canopy Growth?
Before you consider Aurora Cannabis, you may want to hear this.
Motley Fool Canadian Chief Investment Advisor, Iain Butler, and his Stock Advisor Canada team just revealed what they believe are the 10 best stocks for investors to buy right now... and Aurora Cannabis wasn't one of them.
The online investing service they've run since 2013, Motley Fool Stock Advisor Canada, has beaten the stock market by over 3X. And right now, they think there are 10 stocks that are better buys.
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.
The Motley Fool owns shares of and recommends Constellation Brands. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.