Canopy Growth (TSX:WEED) stock has given investors a volatile and ultimately unprofitable ride since cannabis was legalized in 2018. Since that time, the stock has fallen 98.5%, one of the worst routs of any TSX stock in the period.
Cannabis stocks, in general, have performed poorly since cannabis was legalized. Although the sector got a sales boost from legalization, it was not as big as what investors had hoped for. Additionally, cannabis companies spent many billions of dollars buying up their smaller competitors in the lead-up to legalization, which caused losses to mount in the post-legalization period. So, while the cannabis firms saw their sales rise, they also suffered massive impairment losses that caused their profits to decline. They also burned through billions in cash that they had raised in the pre-legalization bull market, with almost nothing to show for it.
Image source: Getty Images
Why WEED stock is crashing
WEED stock is crashing primarily for the same reasons that other cannabis stocks are crashing: it’s losing money, and its sales are stagnating.
Earlier, I said that cannabis companies saw their sales increase immediately after cannabis was legalized. That was true for a while, but this year, sales are not growing much at all. In its most recent quarter, Canopy delivered the following:
- $121.1 million in revenue, up 2.5%
- A $91 million operating loss, improved from -$1.8 billion
- A $41 million net loss, improved from $2.09 billion
- $533 million in cash
Although Canopy’s sales did grow slightly and its losses got smaller, the company still lost money. It has $533 million remaining from the $5 billion it raised from selling shares to Constellation Brands. Once that money runs out, it’s not clear how Canopy will cover its day-to-day operating expenses. Potentially, it will have to start selling assets. If that happens, then the company’s revenue might start shrinking, like it did earlier this year.
Why it could go lower
There are several reasons why WEED stock could go even lower than where it is now:
- It’s losing money
- It’s burning through its cash rapidly
- Its sales and balance sheet assets will be eaten away at by continued losses, so apparently low valuation metrics don’t tell the full story about what the company is “worth”
All of these factors combined suggest that WEED stock could reach lower levels than the one it trades at now. Although the stock is optically cheap, trading at 1.2 times sales and 0.72 times book value, its assets are declining. So, it may not be as cheap as it looks.
Foolish takeaway
I avoided cannabis stocks all through the 2018 bubble, and I’ll keep avoiding them today. While it’s tempting to go bargain hunting in sectors that have fallen more than 90% in value, the fact is that weed companies are actively losing money and shrinking. They aren’t getting more valuable just because their prices are declining. I would avoid the cannabis sector in general, and Canopy specifically, for the foreseeable future. That doesn’t mean that these stocks will never be good buys, but we need some indication that they will survive as businesses.
