Canadian cannabis stocks have taken investors on a roller-coaster ride in recent years. For instance, between January 2015 and 2019, shares of Canopy Growth (TSX:WEED) surged over 1,600% due to optimism surrounding cannabis legalization. After touching all-time highs in April 2019, WEED stock is currently trading over 95% below record prices.
In the last few years, the marijuana producer has been wrestling with industry-wide issues ranging from competition from illegal sales to the slow rollout of retail stores in major provinces, overvalued acquisitions, and rising competition.
Moreover, the cannabis industry is heavily regulated in Canada, and marijuana producers face several limitations when it comes to product-based advertising. These headwinds resulted in an oversupply of cannabis, low profit margins, high inventory levels, and multi-billion-dollar write-downs.
In fact, a report from Miller Thomson, a law firm, claims Canadian investors have lost around $130 billion in marijuana stocks. A lawyer at Miller Thomson, Larry Ellis, also stated, “it’s an industry that has been created by the Canadian government and frankly set up to fail.”
Currently trading near multi-year lows, let’s see if you should invest in Canopy Growth stock right now.
Is Canopy Growth stock a falling knife?
Canopy Growth has increased its sales from $398.7 million in fiscal 2020 (ending in March) to $520 million in fiscal 2022. However, its operating losses in the last three years have totaled more than $2 billion, with the company unable to report a gross profit in the last seven quarters.
To improve the bottom line, Canopy Growth stock has shut down manufacturing facilities, reduced its workforce, and divested its retail operations in Canada.
Despite these downsizing efforts, analysts expect Canopy Growth to report an adjusted loss of $4.55 per share in fiscal 2023, compared to a loss of $0.58 per share in fiscal 2022. In the third quarter (Q3) of 2023, Canopy’s sales were also down 28% year over year at $101 million.
The company ended the December quarter with less than $800 million in cash and $1.3 billion in debt. It will soon have to raise equity or debt capital to support its cash-burn rates, diluting shareholder wealth or further leveraging its balance sheet in the process.
Canopy raised $203 million in convertible debentures this February, providing it with enough liquidity to sustain operations for at least a year, given it has also identified $160 million in cost savings for the next 12 months.
Canopy Growth is now banking on the U.S. to decriminalize the recreational consumption of cannabis at the federal level, which will provide the pot giant access to the world’s largest marijuana market. However, the cannabis market south of the border is already crowded with the presence of several multi-state operators.
What is the price prediction for WEED stock?
Out of the eight analysts tracking Canopy Growth stock, six recommend a “buy,” and two recommend a “sell.” Bay Street now expects WEED stock to surge 31% in the next 12 months, despite its weak fundamentals.
I believe Canopy Growth stock does not offer a compelling risk/reward profile for investors. There are several other TSX stocks you can buy at a lower valuation right now.
