After touching all-time highs in October 2018, shares of Canopy Growth (TSX:WEED) currently trade 98.6% below record levels. Investor optimism was at its peak when Canada legalized marijuana for recreational use in October 2018. However, since then, the Canadian cannabis sector has been wrestling with industry-wide headwinds ranging from rising competition and oversupply of cannabis products to high inventory levels and negative profit margins.
In order to support their high cash-burn rates, several marijuana producers were forced to raise equity capital several times, diluting existing shareholder wealth significantly. Additionally, several established players, including Canopy Growth, acquired companies at a hefty premium to gain market share and expand their manufacturing capabilities. In the last few years, these overvalued acquisitions compelled cannabis producers to write down goodwill impairments that totalled billions of dollars.
Valued at a market cap of $911 million, Canopy Growth stock has burnt massive investor wealth in recent years. Let’s see if the cannabis stock stages a recovery in 2024.
Canopy Growth continues to struggle
In fiscal 2024 (ended in March), Canopy Growth reported a net loss of $675.8 million, while its sales totalled $297.1 million. In fact, the company’s operating losses of $309.6 million were higher than its sales, which indicates it is nowhere close to profitability.
Now, investors generally invest in unprofitable companies as they hope steady top-line growth will improve economies of scale over time. However, in the fiscal fourth quarter (Q4) of 2024, Canopy Growth increased its sales by just 7% year over year to $72.8 million.
While Canopy has narrowed its losses, its cash outflow totalled $282 million in 2024, compared to an outflow of $557.5 million in 2023. With $206 million in balance sheet cash, Canopy Growth would have to raise equity capital within the next 12 months.
Will the U.S. offer a comeback opportunity?
Cannabis stocks, including Canopy Growth, have gained momentum in 2024 due to the prospect of marijuana legalization in the United States. Shares of Canopy Growth have risen by 40% year to date as the U.S. is all set to declassify marijuana as a Schedule I drug.
To gain a foothold in the world’s largest cannabis market, Canopy Growth created a special-purpose vehicle called Canopy USA. While the two entities are currently separate, they are likely to merge if and when the U.S. government legalizes pot at the federal level.
Canopy USA has already acquired companies such as Acreage Holdings, Jetty Extracts, and Wana Brands and is focused on consolidating these assets to benefit from cost synergies and operational efficiencies.
The prospect of legalization might seem compelling to investors. However, Canopy Growth will still need to compete with established multi-state operators such as Green Thumb and Cresco Labs, which have a sizeable presence in several regions. Moreover, Green Thumb reports a consistent profit and is free cash flow positive, making it a much better investment option right now.
What is the target price for WEED stock?
Canopy Growth is forecast to narrow its loss per share from $8.79 in fiscal 2024 to $1.71 per share in 2025 and $1.21 per share in 2026. While its losses are forecast to decline, it is still a few quarters away from profitability.
Analysts tracking WEED stock have a 12-month average target price of $9.13 for Canopy Growth, marginally higher than its current price of $8.90. The risk-reward profile for Canopy Growth is far from ideal, given you can invest in several other fundamentally strong stocks in 2024.
