Canadian cannabis stocks have been among the worst-performing companies on the TSX in the last five years. Shares of most cannabis producers were trading near all-time highs when Canada legalized marijuana for recreational use in October 2018, driving investor optimism in the process.
Canadian marijuana producers, including Canopy Growth (TSX:WEED), invested heavily to expand their manufacturing capabilities and allocated significant resources towards acquisitions. However, the tight regulations associated with this sector led to the slow rollout of retail stores in major Canadian provinces. Additionally, restrictions on advertisements made it difficult for brands to differentiate themselves from competitors. Licensed cannabis producers also had to wrestle with competition from lower-priced products available in the illegal market.
These headwinds led to tepid consumer demand, high inventory levels, and massive losses. To reduce their cash-burn rates, Canopy Growth and other Canadian pot producers were forced to shut down production facilities and lay off employees.
Today, Canopy Growth stock is valued at $357 million by market cap and trades 99.5% below all-time highs. Let’s see if the worst is over for Canopy Growth stock and if it can stage a rebound in 2024.
How did Canopy Growth stock perform in fiscal Q3 of 2024?
In the fiscal third quarter (Q3) of 2024 (which ended in December), Canopy Growth reported net revenue of $78.5 million, a 7% decline year over year. The company attributed the revenue decline to the divestiture of its sports nutrition business, BioSteel.
Similar to other marijuana producers, Canopy Growth is focused on improving profit margins. In Q3, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss narrowed to $9 million from $49.7 million in the year-ago period. Its free cash outflow stood at $33.9 million, an improvement compared to an outflow of $78.9 million in the same period last year.
Canopy’s cash position is vulnerable
Canopy Growth was considered among the safest investments among cannabis stocks due to its association with alcohol beverage giant Constellation Brands (NYSE:STZ). Back in 2018, Constellation Brands invested US$4 billion in Canopy Growth for a 35% stake, providing the latter with liquidity to expand its portfolio of products, enter new markets, and target accretive acquisitions.
The collaboration with Constellation Brands also provided Canopy Growth with the expertise to navigate a highly regulated industry and the opportunity to create cannabis-infused beverages. Moreover, Canopy Growth would benefit from Constellation’s distribution channels, allowing it to reach a broader base of customers.
Over the years, Canopy Growth could easily sustain its losses due to the investment received from Constellation Brands. Investors hoped the marijuana producer would turn profitable at some point, given its leadership position in Canada. However, Canopy ended fiscal Q3 with less than $200 million in cash and $693 million in debt.
Investors generally reward loss-making companies that are able to grow their top line at a steady pace. However, Canopy Growth is also struggling to grow sales. The company reported record revenue of $546 million in fiscal 2021 and is forecast to end fiscal 2024 with sales of $329 million.
The takeaway
Canopy Growth is a fundamentally weak company. To regain investor confidence, it would have to shore up profit margins, deliver consistent cash flows, and grow revenue. In summary, Canopy Growth stock remains a high-risk bet, despite its beaten-down stock price.
