Canopy Growth Corp. (TSX:WEED) has been rallying big time. It has, in fact, more than doubled in the last five days and is up 245% since its March lows. What’s going on? Is Canopy Growth stock finally about to live up to its promise?
While recent developments are somewhat exciting, there’s something I’m still very concerned with. Let’s take a look.
Canopy Growth stock is surging
There’s no denying – recent trading in Canopy Growth stock is quite interesting.
Its days as the investor favourite cannabis stock have been over for quite some time. After its rapid and prolonged downfall and a reverse split, this stock had been languishing. But today, the volatility is back, and this time it’s heading in the right direction again.
Legalization progress
Although news about cannabis legalization settled into the background over the last few years, there have been positive developments on this front.
For example, in March, the German government has approved the legalization of cannabis. As of April 1st, cannabis will be recognized as a non-narcotic. The growth opportunities that this presents to Canopy’s Storz & Bickel brand, as well as its medical cannabis offerings, are significant. Canopy is a top three player in the German cannabis industry.
Furthermore, in the U.S., things seem to be advancing. Even though legalisation has taken longer than many had hoped, the end game seems to be fast approaching. At this time, cannabis is legal in 30 out of 50 states for medical use and 24 states for recreational use. But federal legalization has yet to come.
But they are inching forward. An estimated 88% of Americans support legalization. It seems that President Biden is responding to his voters’ desires and working on reclassifying cannabis to a Schedule 3 drug. This means that the drug has less potential for abuse and an accepted medical use. It’s currently listed as a maximally restricting Schedule 1 drug. This is the same classification as drugs like heroin and ecstasy.
This reclassification would undoubtedly drive positive momentum for the cannabis industry and cannabis stocks in the United States.
Canopy Growth has been holding on
After its big expansion in the early days of Canadian legalisation, Canopy Growth ran into big problems. Demand was not as strong as many had anticipated, costs were mounting, and the company’s cash burn was placing it in jeopardy.
As a result, Canopy Growth stock has fallen dramatically from its 2018 highs of more than $700. The cannabis industry clearly did not take off as quickly or smoothly as investors were planning. So we’ve been waiting.
The problem
Of course, as I mentioned, there is a problem that I’m concerned about. At this time, revenue growth is weak, net losses are piling up, and the company’s cash burn remains high. In the company’s latest quarterly results, revenue declined 7%, net losses increased to -$2.62 per share, and cash from operations came in at negative $260 million.
Although all of the progress in the legalization effort is good news, the company is still on thin ice. Its cash balance is declining, its debt balance is still high, and profits remain elusive. Canopy Growth stock is a speculative buy at best.
