Shares of cannabis producers, including Canopy Growth (TSX:WEED) have been on an absolute tear in recent trading sessions. Since Aug. 30, Canopy Growth stock has surged over 70%, valuing the company at a market cap of $740 million.
Despite these outsized gains, WEED stock continues to trade 98.6% below all-time highs, trailing the broader markets by a wide margin in the past five years.
Let’s see what has driven the recent uptick in this marijuana stock, and if it can sustain the momentum in September 2023.
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Is the U.S. legalizing cannabis use?
Last week, a Bloomberg report stated a top official from the U.S. Department of Health and Human Services (HHS) sent a letter to the Drug Enforcement Agency (DEA) to remove marijuana from the list of Schedule I drugs.
Currently, marijuana is classified as a Schedule I drug, which is typically defined as a drug with no medical use and a high potential for abuse. Other drugs, including heroin and LSD, are also classified under Schedule I.
Expectedly, the DEA stated it would commence a review before it makes a decision to declassify marijuana. Does this mean the U.S. government is on the cusp of legalizing or at least decriminalizing the recreational use of marijuana at the federal level?
I believe it might still take a few more years for the U.S. to make a landmark judgment on this issue. However, during the presidential campaign back in 2020, the Democrats claimed they would decriminalize marijuana use at the federal level.
What’s next for Canopy Growth stock?
The legalization of pot south of the border will act as a massive tailwind for Canopy Growth and other Canadian licensed producers, as the U.S. is the largest marijuana market in the world.
Currently, Canadian marijuana producers are wrestling with several structural issues ranging from overvalued acquisitions to cannibalization from the illegal markets and oversupply of cannabis, leading to lower profit margins and high inventory levels.
In the first quarter (Q1) of 2024 (ended in June), Canopy Growth reported revenue of $108.7 million, an increase of 3% year over year. Its high-margin medical marijuana sales stood at $14.4 million, compared to $13.4 million in the year-ago period.
In the last two years, Canopy Growth has focused on lowering its cost base by closing down manufacturing facilities. It reduced costs by $172 million in Q1 but still reported an EBITDA (earnings before interest, tax, depreciation, and amortization) loss of $57 million, compared to $78 million in the year-ago period.
Canopy Growth is among the largest marijuana producers in Canada and enjoys a first-mover advantage. But Bay Street forecasts the company to increase sales by just 5% year over year to $423.6 million in fiscal 2024.
Moreover, sales from Canopy’s core business declined significantly in the June quarter, which was offset by strong performance for products such as sports hydration, vaporizers, and wellness.
Canopy Growth ended Q1 with $571 million in cash and $1 billion in debt. It aims to reduce debt to $437 million by the end of fiscal 2024. But with a cash outflow of $151 million in Q1, Canopy Growth will have to raise additional capital and support its cash burn rates, diluting shareholder wealth in the process.
Canopy Growth stock remains a high-risk investment due to its weak fundamentals, tepid top-line growth estimates, and uninspiring profit margins.
