It hasn’t been a great start to the year for cannabis producer Canopy Growth (CGC 6.41%), as its shares are already down 29% this year. The stock has struggled to win over investors in recent years. A highly competitive Canadian cannabis market has made it difficult for the company to grow without burning through cash and incurring hefty losses along the way.
Earlier this month, the company released its latest quarterly results, which showed a significant improvement in the bottom line. Does this indicate something positive, that perhaps the stock can finally turn things around this year?
A closer look at how Canopy Growth performed in Q3
For the last three months of 2023, Canopy Growth reported net revenue of 78.5 million Canadian dollars, which was down 7% on a year-over-year basis. A big part of the reason for the decline in the top line was that the company has gotten smaller by divesting its sports nutrition business BioSteel, which Canopy Growth previously said was a significant drain on cash.
The company has been focusing on becoming leaner in an effort to slow its cash burn and improve profitability. Last quarter, Canopy Growth’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of just under CA$9 million was much smaller than the CA$49.7 million adjusted EBITDA loss it incurred a year earlier. Its free cash flow for the quarter was a negative CA$33.9 million, which was also an improvement from the prior-year period when Canopy Growth’s free cash was a negative CA$78.9 million.
Overall, it was an improved quarter for Canopy Growth, but investors seem uninspired by the company’s latest update.
Canopy USA remains the focal point of its strategy
For years, the big draw for investing in Canopy Growth has been that it would be ready to move into the U.S. pot market once it’s legal to do so. It has reached tentative deals with Acreage Holdings, Wana Brands, and other U.S.-based cannabis companies that it hasn’t been able to close on due to the federal ban on pot in the U.S.
Marijuana legalization isn’t on the horizon in the U.S., so Canopy Growth is doing the next best thing: Creating a special purpose vehicle for all the pending deals it has with U.S.-based companies, called Canopy USA. There is a shareholder vote scheduled for April 12, which, if successful, will move things forward and pave the way for the creation of a new class of non-voting, non-participating exchangeable shares.
Canopy Growth says it expects “to be the first and only U.S. listed company offering shareholders a unique opportunity to gain exposure to the fastest growing cannabis market in the world.” It will have a non-controlling interest in the entity, and it will be an “unconsolidated investment.” The Nasdaq exchange had previously objected to Canopy Growth consolidating the results of U.S.-based cannabis companies, which is why investors shouldn’t expect to see those results pad up Canopy Growth’s own numbers anytime soon.
My concern as an investor would be that Canopy Growth continues paying too much attention to a market that is unavailable and is likely to continue to be unavailable to the Canadian pot producer for the foreseeable future. Spending time and money on this elaborate setup for Canopy USA in the hopes of someday being able to capitalize on those opportunities doesn’t seem like a great use of resources, especially since Canopy Growth’s financials still need lots of work to get to breakeven and for this to be a viable investment.
Not enough has changed (improved) for Canopy Growth stock to be a buy
Canopy Growth investors only need to look to rival Aurora Cannabis as proof that even achieving positive adjusted EBITDA may not be enough to turn things around for the troubled pot stock. Aurora has posted an adjusted EBITDA profit for five straight quarters, and that hasn’t resulted in a significant rally.
Investors have simply lost trust in these companies, and rightly so. Even if Canopy Growth gets to breakeven, its strategy for long-term growth is questionable, given that the U.S. doesn’t look like it’s legalizing marijuana in the near future. And that would need to happen for investors to become bullish on the company’s long-term growth opportunities.
Although Canopy Growth’s financials are improving, there’s still not a compelling enough reason to invest in the stock, as it could still be a tough road ahead for investors.