Canopy Growth (TSX:WEED) is not doing well in 2023. Down 26% in the month of February alone, it’s really taking investors for a ride. As I’ve written in numerous past articles, cannabis companies are struggling with profitability. Additionally, they’re suffering from a dearth of catalysts that could inspire optimism and get investors to overlook their poor fundamentals.
However, with all of these losses, pot stocks are getting “cheaper,” at least in terms of the amount of dollars it costs to buy a share. It’s not entirely clear that cannabis stocks are cheapening in terms of the amount of profit you get when you buy a share. Nevertheless, Canopy Growth itself is at least a real company, doing actual sales to actual customers. This makes it better than much of what goes on in the cannabis space, so it makes sense to assess whether the stock could be a buy.
Why Canopy is down so much
Canopy Growth is going down mainly because its last few earnings releases have been poor. In the last few quarters, Canopy has lost money and had negative revenue growth. As an example, we can look at the most recent quarter, when the company earned the following:
- $122 million in revenue, down 20%
- A $1.8 billion operating loss, worsened by 1,000%
- -$2 billion in net income, down from $350 million in positive net income
- -$5.23 in earnings per share (EPS), down from $1.02 in positive EPS
It was a pretty bad showing. And previous quarters were similar: declining revenue, massive losses, huge write-downs, and other such issues. It’s become clear that the post-legalization “growth spurt” for Canadian cannabis stocks is over. In light of this, investors should look elsewhere; a lower stock price doesn’t make something a buy if its earnings are declining even faster.
Is it a buy today?
Having looked at Canopy Growth’s most recent earnings release, it’s time to answer the question, “Is the stock a buy?”
The answer would appear to be a clear “No.” I’ve followed cannabis stocks since long before legalization, and their earnings have never been very good. When these stocks rally, it’s usually because of rumours that cannabis will be legalized somewhere — for example, in the United States at the federal level. The shares tend to give up their gains after legalization doesn’t occur. Also, in Canada, legalization never did give the big cannabis companies the catalyst they needed to become profitable. They did go through a period where their revenue growth was high, but losses increased faster than revenue, and the revenue growth reversed after a few years anyway.
If you’re just reading about cannabis stocks here for the first time, you shouldn’t be discouraged. The Canadian markets are full of great companies that have produced consistent profits over the years. Examples include Fortis, CN Railway, and Alimentation Couche-Tard. Any of those stocks would be a great addition to your portfolio. As for Canopy Growth, not so much.
