Should You Buy Canopy Growth (TSX:WEED)?

After posting disappointing results, shares of Canopy Growth Corp (TSX:WEED)(NYSE:CGC) dropped significantly, prompting many to question whether the cannabis darling is still a great long-term investment.

| More on:

In case you haven’t noticed, Canada’s enviable cannabis sector has been busting more than booming lately. In the months and weeks counting down to legalization, cannabis stocks such as Canopy Growth (TSX:WEED)(NYSE:CGC) shot well into the stratosphere. Unfortunately, after a rally in the early part of the year, pot stocks have taken a turn and dropped sharply. In the case of Canopy, the stock is down 44% in the past six-month period, trading right near its 52-week low.

Let’s take at why the cannabis sector is lagging, and if Canopy is still the incredible investment that it was once was.

Are expectations too high?

When legalization was first announced, investors and analysts alike viewed it as the incredible opportunity that it was. For Canopy, that hype amounted to an incredible amount of investment capital, which was used to boost production and distribution capabilities. The company also completed several acquisitions to bolster its standing at home and abroad.

Each of those actions drove expectations higher and attracted even more investments. This was a new segment of the market, and Canopy was the market leader.

The only problem was (and continues to be) profitability.

Earlier this month, Canopy reported earnings for the first fiscal quarter of 2020. During the quarter, Canopy reported a loss of $1.28 billion, or $3.70 per share, which was a stark difference from the loss sustained in the same quarter last year, which amount to $91 million, or $0.40 per share.

A non-cash loss of $1.18 billion was the primary driver for the loss, which was attributed to the extinguishing of warrants held by one of Canopy’s larger investors, Constellation Brands. A restatement of investor rights between the companies was made at the end of June, which resulted in the non-cash loss.

Adjusted EBITDA  for the quarter came in at a loss of $92 million, which reflected a small improvement over the $97.7 million loss reported in the prior quarter. Canopy noted that some of that loss was also attributed to expansion costs, particularly a hemp facility in New York.

When can we expect a profit?

That’s the question on every investor’s mind; it is difficult to answer. This is still a segment of the market that is very much in its infancy that is continuing to evolve.

Adding to that complexity is what many are referring to as legalization 2.0 — the introduction of edibles into the market is set to begin later this year. That expansion will bring a flurry of new products such as beverages, edibles, and vapes to the market, with Canopy and its peers ramping up production and making investments into those new product verticals.

What this means is that investors should view the sector as one that is still in its infancy and, by extension, view Canopy as a company that is still in a start-up mentality, where investments and ramping up production is key and posting a huge profit comes secondary.

Final thoughts

Canopy is an intriguing investment that is operating in uncharted territory, but it’s not all bad news. While the stock may be down considerably year to date, Canopy is still up over 260% in the past two years.

Investors that have long-term timelines and an appetite for short-term risk may want to include the company as part of a larger, well-diversified portfolio.

However, if your investing timeline is shorter and you haven’t already invested in Canopy, you may want to consider any number of other, more defensive options, many of which come with handsome dividends.

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 Demetris Afxentiou has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »