Is the Worst Over for Canopy Growth Stock?

Down 99% from all-time highs Canopy Growth stock has burnt investor wealth and remains a high-risk investment.

| More on:
Pot stocks are a riskier investment

Image source: Getty Images

Canadian cannabis stocks have been among the worst-performing companies on the TSX in the last five years. Shares of most cannabis producers were trading near all-time highs when Canada legalized marijuana for recreational use in October 2018, driving investor optimism in the process.

Canadian marijuana producers, including Canopy Growth (TSX:WEED), invested heavily to expand their manufacturing capabilities and allocated significant resources towards acquisitions. However, the tight regulations associated with this sector led to the slow rollout of retail stores in major Canadian provinces. Additionally, restrictions on advertisements made it difficult for brands to differentiate themselves from competitors. Licensed cannabis producers also had to wrestle with competition from lower-priced products available in the illegal market.

These headwinds led to tepid consumer demand, high inventory levels, and massive losses. To reduce their cash-burn rates, Canopy Growth and other Canadian pot producers were forced to shut down production facilities and lay off employees.

Today, Canopy Growth stock is valued at $357 million by market cap and trades 99.5% below all-time highs. Let’s see if the worst is over for Canopy Growth stock and if it can stage a rebound in 2024.

How did Canopy Growth stock perform in fiscal Q3 of 2024?

In the fiscal third quarter (Q3) of 2024 (which ended in December), Canopy Growth reported net revenue of $78.5 million, a 7% decline year over year. The company attributed the revenue decline to the divestiture of its sports nutrition business, BioSteel.

Similar to other marijuana producers, Canopy Growth is focused on improving profit margins. In Q3, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss narrowed to $9 million from $49.7 million in the year-ago period. Its free cash outflow stood at  $33.9 million, an improvement compared to an outflow of $78.9 million in the same period last year.

Canopy’s cash position is vulnerable

Canopy Growth was considered among the safest investments among cannabis stocks due to its association with alcohol beverage giant Constellation Brands (NYSE:STZ). Back in 2018, Constellation Brands invested US$4 billion in Canopy Growth for a 35% stake, providing the latter with liquidity to expand its portfolio of products, enter new markets, and target accretive acquisitions.

The collaboration with Constellation Brands also provided Canopy Growth with the expertise to navigate a highly regulated industry and the opportunity to create cannabis-infused beverages. Moreover, Canopy Growth would benefit from Constellation’s distribution channels, allowing it to reach a broader base of customers.

Over the years, Canopy Growth could easily sustain its losses due to the investment received from Constellation Brands. Investors hoped the marijuana producer would turn profitable at some point, given its leadership position in Canada. However, Canopy ended fiscal Q3 with less than $200 million in cash and $693 million in debt.

Investors generally reward loss-making companies that are able to grow their top line at a steady pace. However, Canopy Growth is also struggling to grow sales. The company reported record revenue of $546 million in fiscal 2021 and is forecast to end fiscal 2024 with sales of $329 million.

The takeaway

Canopy Growth is a fundamentally weak company. To regain investor confidence, it would have to shore up profit margins, deliver consistent cash flows, and grow revenue. In summary, Canopy Growth stock remains a high-risk bet, despite its beaten-down stock price.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

More on Cannabis Stocks

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

Buy the Dip Before It’s Too Late: This Canadian Stock Won’t Stay Cheap Forever

Investors might think that cannabis stocks are out, but this one could be the top Canadian stock to consider.

Read more »

a person watches a downward arrow crash through the floor
Stocks for Beginners

Plummet Alert: Is This TSX Growth Stock a Bargain or a Falling Knife?

This growth stock was once a major winner, but can investors wait for more?

Read more »

Medicinal research is conducted on cannabis.
Cannabis Stocks

What to Know About Canadian Cannabis Stocks for 2025

Let's dive into two top Canadian cannabis stocks and where they may be headed from here (given the recent moves…

Read more »

Researcher works in hemp field
Cannabis Stocks

Aurora Cannabis Stock Is up 46% in 2025: Are Investors Going From 5 Years of Pain to a 2025 Gain?

Shares of Aurora Cannabis have staged a comeback in 2025, outpacing the broader markets comfortably. Is ACB stock a good…

Read more »

A plant grows from coins.
Stocks for Beginners

3 Growth Stocks That Could Skyrocket in 2025 and Beyond

It could be a big year for these sectors, and these growth stocks in particular throughout 2025.

Read more »

money goes up and down in balance
Tech Stocks

2 TSX Stocks to Buy and 2 to Avoid in the Looming Trade War

The looming U.S.-Canada trade war has changed the business environment. Here are some TSX stocks to buy and avoid in…

Read more »

space ship model takes off
Cannabis Stocks

2 Canadian Stocks With Strong Momentum for 2025

Celestica Inc. (TSX:CLS) stock and Dollarama (TSX:DOL) stock have sustained strong price growth momentum for a long time.  Here’s why…

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Pot Stocks: Buy, Sell, or Hold in 2025?

Cannabis stocks remain a bit risky, but could long-term investors be in for more pain or far more profits?

Read more »