Canopy Growth Corp (TSX:WEED) has been the limbo bar of stocks: when you think it can’t go lower, it goes lower still. Technically, the stock is currently up from its post-legalization low of $0.50, set back in July. However, it’s still down 99% from the highs set just before legalization.
The question has to be asked:
Will this stock ever be a buy?
WEED stock is currently inexpensive by some measures. For example, it has a price/book ratio of exactly one, which is low by the standards of today’s market. However, the company keeps losing money and spending its cash pile, which means the “book value” in the denominator of the aforementioned price/book ratio is shrinking. It’s only natural for a value investor to feel tempted by a stock that’s flirting with all-time lows, but nevertheless, red flags remain. In this article, I will explore the question of whether Canopy Growth Corp stock will ever be a buy.
In its most recent quarter, Canopy Growth Corp managed to eke out slightly positive revenue growth of 2.5%. This was a good showing for Canopy, as its revenue has mostly been declining lately. In the trailing 12-month period, the company’s revenue declined 12.8%. Over the last three years, its revenue declined by 8.3% CAGR. Revenue is still up by an impressive 31.5% CAGR over the last five years, but remember that five years ago, the stock went for $42. Overall, the recent story of Canopy Growth Corp is one of persistent decline.
Another thing that Canopy has been very persistent about over the last few years is losing money. In its most recent quarter, it lost $31 million. In the prior-year quarter, it lost a full $2 billion! Granted, the loss witnessed in the previous quarter was much improved from a year before. But still, it was significant. Back in 2018, Canopy got a $5 billion investment from Constellation Brands, a U.S. beverage company. Today, the cash pile that came from that deal is down to $533 million. So, Canopy’s losses have not just been on paper accounting losses. The company has been genuinely bleeding cash.
This all has bearing on WEED’s valuation. The stock is optically cheap, with low price/sales and price/book ratios. However, sales and book value are both declining. If Canopy keeps burning cash at the rate it has been since the 2018 Constellation Brands investment, it will eventually have no book value to speak of. Should that occur, the stock will not look to have been cheap at today’s prices.
The final verdict
Having reviewed the pertinent valuation and financial performance metrics, I’m prepared to deliver a verdict on whether Canopy Growth Corp stock will ever be a buy.
First things first, I do not consider it a buy now. We’ll need to see at least another quarter’s earnings before we can be sure the cash burn and book value disappearance can be mitigated.
As for whether the stock can ever be a buy, well, it’s possible. If the company cuts costs enough it may someday become profitable. However, cannabis is a commodity, one with lots of suppliers. I wouldn’t touch stocks in this industry until after a few big name producers go out of business. Then and only then will cannabis be interesting.