Canopy Growth (NYSE:CGC) remains the world’s largest cannabis company, but Canopy Growth stock continues to struggle.
The market price of dried cannabis continues to fall, and cannabis oil has also reached a state of oversupply. The uncertainty worsened when Canopy Growth investor Constellation Brands (NYSE:STZ) helped influence the firing of CEO and board member Bruce Linton.
With losses continuing and revenues falling, CGC and its peers have sold off. Although the company should maintain its industry leadership, this uncertainty could mean that investors should avoid Canopy Growth stock for now.
CGC Is a Commodity Stock
Linton’s firing came as a surprise. Linton co-founded the company, and much like companies in newly-formed industries with massive revenue growth, he focused on expansion at the expense of short-term profits. However, with that emphasis leading to a string of unprofitable quarters, the pain likely became too much for Constellation.
I have long said that marijuana stocks would eventually resemble alcohol and tobacco stocks. Such equities trade at low multiples and pay generous dividends. Today, CGC could not be further away from that point.
Still, as my colleague Tezcan Gecgil points out, marijuana remains an agricultural commodity. As such, it will face the same type of demand and supply issues as tobacco, corn, cotton, or any other crop. While such products remain essential to human survival, investors rarely link them with stock market excitement.
Valuations and CGC Stock
Investors should also note that CGC still trades at almost 67 times sales. The company will also not earn a profit until next year at the earliest. Hence, despite the move back toward the 52-week lows, fundamentals offer little help in evaluating Canopy Growth stock.
However, as Thomas Niel argues, mounting losses increase the danger of stock dilution. I do not see dilution hitting CGC as hard as the Aurora Cannabis (NYSE:ACB). Still, he mentions how the Constellation deal could ultimately lead to the issuance of an additional 139.8 million shares. Moreover, convertible debt that becomes common stock in 2023 would place a minimum of 12.4 million additional shares on the market.
Outside of the company, an oversupply of cannabis will probably hurt revenues. This could not only lead to more substantial losses, but it could also lead investors to question the premium they have given to CGC and peers such as Aurora Cannabis, Tilray (NASDAQ:TLRY), and Cronos Group (NASDAQ:CRON).
As a result of this turmoil and weakness in the overall cannabis sector, the Canopy Growth stock has fallen below $34 per share. This amounts to a decline of more than 40% from its 52-week high. It also indicates that CGC could retest the 52-week low of $24.46 per share, near the lows set last summer.
Given the supply glut, I see a high likelihood of this retest. High valuations could also lead it to fall further. Those who remember the 1990s tech bubble know that even well-established companies can lose 90% or more of their value in a market downturn. Marijuana stock investors should heed these lessons.
Final thoughts on Canopy Growth Stock
Turmoil, both from within and outside of the company, means investors should probably stay out of CGC stock in the near term. The surprise ouster of the CEO brings uncertainty to the company in general. Moreover, the marijuana supply glut in Canada will depress revenue growth.
Still, investors should also not confuse decline with demise. Legal marijuana remains an infant industry. As such, any interruption to revenue growth will become temporary if it occurs at all. Moreover, thanks to Canada’s move to legalize and the Constellation investment, CGC remains the leading stock in this industry.
I do not foresee CGC’s market leadership changing, and massive growth long term should remain on track as more countries move to legalization. However, with shorter-term sentiment turning and valuations remaining elevated, I do not see this as a good time to own Canopy Growth stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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