Is Canopy Growth Stock Worth a Buy in September?

Here’s the bull and bear case behind whether Canopy Growth (TSX:WEED) stock is worth a speculative buy in September or if investors should wait.

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The last quarter (Q1 2024) was quite a confusing one for Canopy Growth (TSX:WEED). All its business segments achieved sequential growth in comparison to Q4 2023. The company was also successful in making cost reductions worth US$47 million, bringing the company’s total cost reduction for the year to nearly US$175 million. 

Additionally, Canopy’s revenue increased to US$109 million, reflecting growth of 3% year over year. That’s not bad. Higher demand for the company’s Tweed brand led this segment to rank eighth in the Canadian adult-use cannabis market’s total flower segment.

Of course, the cannabis sector has been beaten down in recent years, as investors look for other more profitable growth opportunities. Growth hasn’t materialized as expected, and Canopy’s stock price has lost more than 99% of its value, peak to trough, since the bubble peaked.

With that said, let’s dive into some pros and cons as to whether this stock is worth a speculative buy in September.

Canopy Growth continues to simplify its business  

A number of earlier reports in August suggest Canopy is continuing its transformation to a simple and asset-light business model. It is planning to divest its national retail operations and has shut down eight cultivation facilities. This move will help the organization to focus on its two remaining purpose-built cultivation sites and generate a profitable output.   

While some have called this move necessary for Canopy to bolster its balance sheet and move toward breakeven, bulls have reason to believe that this streamlining will allow the company to focus on building its brands.

Notably, Canopy has been outsourcing the manufacture of its edible, beverage and vape products to independent third-party Contract Manufacturing Organizations (CMOs). Apart from this, the company is considering strategic options for BioSteel Sports Nutrition Inc., including a potential selloff. 

All these measures will help Canopy to streamline its business, put increasing focus on long-term growth and generate sustainable profits. That’s the bull case, anyhow.

Canadian cannabis demand remains muted

The reality most cannabis investors have come to accept is that the Canadian market isn’t as explosive in terms of growth, as one would have thought five or six years ago. The market has matured and is hovering relatively steady at levels many thought would have been hit years ago. Indeed, it appears Canada as a whole is more conservative than many projections likened to the country during the legalization process, suggesting that future growth for Canadian companies like Canopy will likely have to come from exports down the line.

Despite recent moves to reclassify cannabis as a Schedule 3 drug in the U.S., little progress has been made toward legalization south of the border. This would undoubtedly be Canopy’s largest market. And without a line of sight toward growth, it’s hard for investors to justify a speculative position in any cannabis player right now.

Bottom line

I’ve long viewed the cannabis production space as one that’s likely to be heavily commoditized in its mature state, with relatively low margins and a few large players. While I think Canopy could be one of those players, I’m not going to bet the farm on that idea, especially with the potential for increased competition from other global players over time.

Personally, Canopy stock isn’t one I’m going to be buying as a speculative pick anytime soon. That said, I can understand the bull case as to why an investor might want to do so. This is a stock that, no matter what one’s view is, should be treated with caution right now, in my view.

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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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