Shares of Canopy Growth (TSX:WEED)(NYSE:CGC) have declined by almost 20% in December 2021, making it among the worst-performing stocks this year. The Canadian cannabis giant is down more than 60% in the last year and has declined 85% from all-time highs. Despite the massive pullback, Canopy Growth stock is valued at a market cap of $4.48 billion.
Let’s see what impacted WEED stock in 2021, and if it should be on top of your buying list for 2022.
Canopy Growth has underperformed the markets in the last three years
Canada legalized marijuana for recreational use at the federal level in October 2018. It has since been a volatile ride for cannabis investors, as companies have been impacted by a wide range of challenges that have negatively impacted top-line and profit margins in this period.
Canopy Growth reported a net loss of $1.7 billion In fiscal 2021 that ended in March, compared to revenue of $547 million. In fiscal 2020, Canopy’s net losses stood at $1.4 billion compared to revenue of $399 million.
In the fiscal second quarter of 2022, Canopy’s adjusted EBITDA stood at $162.6 million significantly wider than the $85.7 million loss in the year-ago period. Its sales also fell 3% year over year to $131.4 million.
We can see why WEED stock has trailed the broader markets by a wide margin. It’s hard to place your bets on a company that is wrestling with negative profit margins and tepid revenue growth.
Legalization in the U.S. will be a positive catalyst for WEED stock
Canopy Growth remains a high-risk bet for investors in 2022. But if marijuana is legalized south of the border at the federal level, WEED stock should gain significant momentum. Canopy Growth is well poised to enter the marijuana market in the U.S., as beverage giant Constellation Brands owns a 38.6% stake in WEED. The backing of Constellation Brands will provide Canopy Growth with a robust distribution network and financial flexibility required to enter new markets.
Canopy Growth has also inked a deal to acquire Acreage Holdings, which is a multi-state operator in the United States. The acquisition will take place once pot is legalized in the country. A similar acquisition agreement will take place with Wana Brands, which is a top edibles brand in the U.S.
Given these opportunities, Canopy Growth is possibly the best-placed Canadian marijuana producer to gain traction in the United States. But there is a lot of uncertainty surrounding the legalization process which may even take several years to materialize.
What’s next for Canopy Growth stock?
WEED stock was trading at a hefty premium in October 2018 and its rapid descent in the last three years has driven down its valuation. Bay Street expects Canopy Growth to grow sales by just 5.3% year over year to $576 million in fiscal 2022 and by 30% to $750 million in fiscal 2023.
However, WEED stock is still trading at a forward price-to-2022-sales multiple of almost eight times, which is still expensive. While I remain bearish on Canopy Growth, Bay Street expects the stock to rise by 35% in 2022.