Canopy Growth (NYSE:CGC) is unquestionably one of the leading names in the cannabis sector. There are some good reasons for that. It is one of the sector’s largest growers. And while oversupply has become a prevailing theme in the cannabis sector, at some point this should become a competitive advantage.
Canopy also has a boat load of cash from Constellation Brands (NYSE:STZ). As of Sep. 30, CGC had holdings of 700 million CAD in cash, cash equivalents and marketable securities on hand, largely coming from Constellation’s investment.
For these reasons, and more, Canopy Growth should be a survivor of the cannabis wars. This was a point echoed by InvestorPlace contributor Todd Shriber when debating if the recent boost in Canopy stock was the beginning of something real, or just a dead cat bounce.
I’m not sure if that matters. The entire cannabis sector is out of favor with investors. Which means Canopy is looking more and more like the tallest of the seven dwarfs. And that’s not an enviable position to be in.
There Is Still a Massive Opportunity in Cannabis
In a report released in May 2019, Grand View Research, Inc. estimates the size of the global legal marijuana market to reach $66.3 billion by the end of 2025. What was even more eye-opening about the report is that it says the industry is expected to expand at CAGR of 23.9% during that time.
However, 2025 is a long way off. And that’s why it’s important for investors to understand why the cannabis industry is still a risky proposition.
There Is Still a Lot of Risk with Canopy Growth Stock
The problem with Canopy Growth stock is the same problem that besets all marijuana stocks. There are many things we don’t know. One question is when will the fundamentals of supply and demand get on track in Canada? Another question is when will legalization actually become a reality in the U.S.? The first question is in the process of resolving itself. The latter is less clear.
When investors were dreaming of becoming marijuana millionaires in 2018, they ignored the law of unintended consequences. Sure, there was pent-up demand. And the major cannabis companies, like Canopy Growth, were going to offer a product that was a safer and cost-effective alternative to the black market.
All that was required was legalization. And that’s where reality set in. Full legalization in the U.S. is still a way off. And even in Canada, which achieved full legalization in October of 2018, the regulatory process has bogged down the process of getting supply chains in order. This meant that bigger was not better and Canopy, among others, got stuck with too much supply.
Constellation May Also Be Losing Patience
Constellation has invested $4 billion into Canopy Growth, giving it a 37% stake in the company. However, as Will Healy wrote in a recent article, this investment does not come without strings attached. And Constellation may be ready to pull on those strings.
Simply put, Constellation is seeing falling revenues in their core markets and they need to start seeing a return on their investment in Canopy Growth. And as Healy pointed out, a falling CGC stock price creates the not completely unreasonable scenario where Constellation may decide to buy Canopy Growth outright.
The Bottom Line on Canopy Growth Stock
There’s a ton of risk that comes with Canopy Growth. But there’s a ton of risk with any cannabis stock. If you look at the stock of any of the major cannabis companies, they’re all the same. Every stock got a lift at some point in 2019, but all have since been on a downward trend.
Some will make the argument then that investing in the leader is the least bad option. But a least bad option is still a bad option if the company is not ready to turn a profit. And Canopy Growth is not ready to turn a profit and may not be profitable in 2020.
Nevertheless, Canopy Growth looks like it will be there when the industry does become profitable. But there are better options for speculative investors right now. And no matter if Canopy Growth is first or worst, it’s a speculative stock. Invest at your own risk.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.
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