Canadian cannabis stocks, including Canopy Growth (TSX:WEED), thumped the broader markets in March 2024. Indeed, WEED stock soared over 160% last month, valuing the company at $1.1 billion by market cap.
Despite its recent gains, the TSX marijuana stock trades 99% below all-time highs, burning massive investor wealth in the last five years. Let’s see if Canopy Growth stock can stage a recovery in 2024 and beyond.
Will marijuana be legalized in the U.S.?
Last month, U.S. President Joe Biden discussed marijuana and emphasized it should be on the path to legalization in the country. Moreover, Vice President Kamala Harris also called for cannabis to be decriminalized at the federal level, resulting in the recent rally.
Additionally, the German government passed a bill that would loosen marijuana laws, making it easier for people to consume it recreationally.
The U.S. is the largest cannabis market in the world. While medical marijuana is legal in several states, it is still illegal at the federal level, prohibiting Canopy Growth and Canadian peers from entering the lucrative market.
In the last five years, Canopy Growth has wrestled with several industry-wide headwinds ranging from tepid demand, oversupply of products, the slow rollout of retail stores in major provinces, inventory write-downs, overvalued acquisitions, and negative profit margins.
Right now, investors are bullish on Canopy Growth stock, especially if it can enter larger markets in the U.S. and Europe, unlocking additional revenue streams for the Canadian-licenced producer and shoring up the bottom line.
Canopy Growth stock is fundamentally weak
Canopy Growth was among the most popular cannabis stocks globally. In 2019, it attracted a multi-billion-dollar investment from beverage giant Constellation Brands, providing it with enough financial flexibility to enter new growth markets, introduce a wide portfolio of products, and target accretive acquisitions.
However, in fiscal Q3 2024 (ended in December), Canopy Growth reported a cash balance of just $188 million. It’s evident that the marijuana heavyweight has to lower costs to reduce its cash burn rate while inching closer to profitability.
In Q3, Canopy Growth increased its adjusted gross margin by 30% year over year to 36%. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) losses narrowed by 82% to $9 million from $49.7 million in the same period last year. The company’s free cash outflow also improved from $78.9 million to $33.9 million in the last 12 months.
Is Canopy Growth stock a good buy?
Last year, the U.S. Department of Health and Human Services urged the Drug Enforcement Agency, or DEA, to declassify cannabis as a Schedule III from a Schedule I drug. However, the DEA has yet to follow the recommendation. Similarly, it may take several years for the U.S. to legalize the recreational use of cannabis, making Canopy Growth a high-risk investment right now.
Canopy Growth could build on its recent gains, or it could easily move lower given its weak fundamentals and a volatile macro environment. The recent hype surrounding WEED stock can lead to a dangerous path, especially for investors who expect shares to move higher. There are much better growth stocks you can add to your equity portfolio than Canopy Growth.
